As part of Seeking Income Week, we’ve already drilled down into the top equity income managers’ portfolios and found their favourite UK stock picks. Now it’s time to quiz Morningstar’s own equity analysts on where they see attractive dividend potential.
Following conversations with our equity analysts about the sectors they cover, the most frequently-mentioned stocks tended to come from utilities and consumer staples–sectors often lauded for their defensive and income-paying qualities. But there were a few surprises too. Below are some of the dividend-payers that Morningstar analysts like to watch.
Pharmaceuticals
GlaxoSmithKline (GSK) has come up time and time again this week. Morningstar OBSR’s Peter Toogood mentioned it in his video on the investing environment, as did Fidelity’s Tom Stevenson in his interview on the role of income, investing author Rodney Hobson name-checked the pharma stock repeatedly in his favourite dividend payers video, and it emerged as a top holding for some of the UK’s best UK equity income fund managers. Glaxo shares currently yield 4.6% by Morningstar calculations.
Morningstar's Damien Conover says of Glaxo: "We expect Glaxo’s strategy will be particularly favourable for investors interested in its dividend as the company's strategy will likely reduce the volatility of cash flows, which suggests a more secure dividend over the long term." Read his full research report here.
Utilities
Morningstar analysts highlight UK utility providers National Grid (NG.) and Scottish and Southern Energy (SSE) as two income-related stocks worth looking at. “Both are utilities that yield near 6% and we think are undervalued,” said analyst Travil Miller, who recently raised his fair value estimate on National Grid to 680p. His colleague Andrew Bischof writes in his research report on SSE that “the company’s dividend, its exposure to power markets and its regulated growth profile could combine for an appealing total return proposition for income-oriented investors.”
Energy
Analyst Josh Peters, who runs the Dividend Builder model portfolio for Morningstar in the US, points to Royal Dutch Shell (RDSB) as one of his favourite high-yielding stocks. The stock trades at an attractive valuation versus Morningstar’s fair value estimate and currently yields 4.5%. Peters says that elsewhere in Europe he’s struggled to find much else of interest from an income perspective.
Consumer Staples
British American Tobacco (BATS) is often touted as a good candidate for an income seeker and Morningstar’s Tom Mullarkey is also a fan. Mullarkey’s new valuation implies a 2012 price/earnings of 15.7 times, a free cash flow yield of 6% and a dividend yield of about 4%. In addition to tobacco, drinks manufacturers are also often in the dividend frame. Josh Peters owns Diageo (DGE) in his Dividend Builder model portfolio but he notes that the stock has recently been trading above our analyst’s fair value estimate.
Financials
When we think of dividends we don’t often think of banks, particularly not after the latest financial crisis and ensuing bank sector debacles. But Morningstar’s Maclovio Pina says income-seekers may wish to look into HSBC (HSBA). “The bank is yielding around 4% by our calculations and it is trading at a nice discount to our fair value estimate,” Pina points out.
Industrials
Aluminium can and plastics packaging firm Rexam (REX), which makes the slim-line cans for Red Bull, currently yields less than 3% but Morningstar’s Todd Wenning thinks there’s plenty of scope for payout improvements here. Find out why here.
