10 shares for dividends

In the third quarter of this year (July to September), the dividends paid by British companies rose 1.6pc, the first rise since early 2009, according to the latest report by Capita Registrars.

Perhaps surprisingly, the biggest growth came from smaller and medium-sized companies. Dividends paid by FTSE 250 companies grew by a third, far faster than the growth in payments by the larger companies that dominate the FTSE 100. These payments actually fell 2pc in the last quarter, although these figures were skewed by BP’s decision to cancel its dividend payout completely following the Gulf of Mexico oil spill.

Carnival controls about 60pc of the cruise market

Carnival controls about 60pc of the cruise market

Amid more general economic pessimism, fund managers say this information shows that many British companies are in rude health. Clive Beagles, equity income manager at J O Hambro, said: “We remain optimistic that this trend will continue.”

The companies starting or reinstating dividend payments to shareholders outnumber by three to one those that cut or cancelled their dividends.

But not all equity income managers are as bullish. Bill Mott, the veteran income manager who now runs Psigma Income, remains “fairly cautious” about the outlook for UK companies.

“I think we are in for a few years of fairly anaemic growth. The companies best placed to pay dividends will be stable, predictable businesses that do not have to spend a lot of money maintaining or growing their market position,” he said. He said these tended to be companies that are already in the dividend arena such as pharmaceutical, telecoms, tobacco and utility companies.

But both fund managers agree that for smart investors there are opportunities for significant dividend growth outside these established stalwarts. Below is a list of companies tipped by various fund managers to deliver strong dividend growth over the next few years.

Of course, those not wanting to risk investing in individual shares should consider an equity income fund, which invests in a broad basket of companies that have the potential to pay a good dividend stream.

Debenhams

Mr Beagles said this high street retailer had certainly had its problems. It stopped paying dividends two years ago, but since then has managed to reduce the debt it is carrying by about two-thirds.

On the back of more optimistic trading statements he said he is optimistic that these payments should resume next year. “If it only paid out a third of its earnings, this would mean a dividend of about 9 to 10p. On current share prices that would represent a yield of about 4.5pc,” he said.

Carnival Cruises

This is another smaller company that Mr Beagles said had the potential to deliver strong dividend growth. The company, which bought P & O Princess at the start of the previous decade, controls about 60pc of the cruise market. It has expanded over the past decade, but again two years ago it cut its dividends right back as customer demand dropped in the wake of the financial crisis. It is now paying a small dividend but this is just a quarter of what it paid before payments were scaled back.

Mr Beagles said: “The company has spent less on new ships, and demand is growing again, so its cash flow position has improved. We would expect to see this translate into a growing dividend stream again.”

Investors should bear in mind that, as this company has a dual listing in Britain and America, dividends are paid in US cents.

BP

Most analysts expect the oil giant to reinstate its dividend payments in 2011. The question is, at what level. Tineke Frikkee, a fund manager at Newton Investments, said: “Optimists might be hoping that payments will resume at its previous level, of about US 14c per quarter, while the most pessimistic commentators reckon shareholders will be lucky to get half this.”

Ms Frikkee said she sat “somewhere between the two” and expected a dividend payment of between 9c and 10c next year. However, although this will show a big jump in dividend payments, the yields may not be as high as other companies’.

She added that fluctuations in the pound to dollar exchange rate could affect returns for British investors.

Tesco (and Sainsbury’s and Morrisons)

Mr Mott said those looking for good dividends and consistent growth should look at these food retailers. Yields currently range from just under 3pc to just over 4pc. “Each of these are good defensive companies,” he said.

“And are looking to expand in various ways, both in the UK, thanks to our growing population, and overseas.” He added: “They are cash generative businesses, with potential for good dividend growth, but they remain a low risk investment, particularly if economic conditions worsen.”

Booker

This cash-and-carry business is also favoured by Mr Mott for future dividend growth. He said: “They have a very good chief executive in Charles Wilson, who has turned the company around from having massive debt to virtually no debt at all.”

The business is involved in a start-up venture in India, but also has the stable cash flow from its UK base. He added: “This company has the potential to grow its earnings and its dividend. And on today’s share price this yield looks attractive.”

L & G

Many life insurers, like other financial companies, scaled back their dividend payments at the start of the credit crisis, but many are now increasing these payments again, on the back of good growth.

Legal & General, for example, halved its dividend at the end of 2008, from almost 6p to 3p. Its last dividend was up 30pc; “But even with this rise there is still considerable scope for further rises to reach their previous levels,” said Mr Beagles. Other life insurers are also edging up dividend payments: Aviva, for example, recently grew its dividend by 10pc‑15pc.

Cape

This industrial services company (which is involved in the safety and maintenance of oil rigs, among other things) has not paid a dividend for 10 years. This has been largely due to it carrying significant debts and having a substantial historical asbestos liability.

But the company has managed to reduce its debts, and has made provision for outstanding asbestos claims. Mr Beagles said: “We expect this company to start behaving as it should have done for the past decade, as a well run £400m company that trades on a reasonable price to earnings ratio.”

HSBC

Analysts expect HSBC to be the bank that provides the biggest dividend growth in 2011. Ms Frikkee said: “Investors must remember again though that this is paid in dollars.”

Although bank balance sheets are improving, political and regulatory consideration could impair their ability to return to dividend yields seen in the past. Ms Frikkee said that, looking to the long term, Lloyds Banking Group looked a good bet to provide a steady and consistent dividend stream, but it is unlikely to start paying shareholders over the next year.

source: telegraph.co.uk

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