How Safe Are Dividends At SSE PLC (6.5%), Centrica PLC (5.8%) And National Grid plc (4.5%)?
I was shocked when I read that Barclays had decided to slash its 2016 dividend by more than half, to yield only around 1.8% instead of the 4.4% the tipsters had been suggesting. And that's reminded me that we should not just assume that our investments are going to keep on paying out the cash.
Look at SSE(LSE: SSE), which is a big favourite among high-yield investors. It's been offering up dividend yields of close to 6% for years, and for the year to March 2016 there's a 6.5% yield forecast, with similar on the cards for the next two years -- a share price that has dropped 16% since May last year to 1,433p has helped boost that percentage.
The problem is, there's a 9% fall in earnings per share predicted for this year, followed by zero change for each of the next two years. In 2015 we saw dividend cover of 1.4 times, but that would drop to just 1.25 times on this year's forecasts, and a shade less by 2018.
In its January trading statement, SSE reiterated its intention of "targeting an increase in the full-year dividend for 2016/17 of at least RPI inflation, with annual increases thereafter of at least RPI inflation".
So we're probably safe for this year and next, but if earnings don't start picking up again, it won't be sustainable for ever.
Dividends at gas supplier Centrica(LSE: CNA) have been less stable, with a couple of years of falling earnings leading to a 21% dividend cut in 2014 followed by another 11% in 2015. There's a further 9% decline in earnings currently forecast for the year to December 2016, yet the City folk are expecting the dividend to be lifted a little to yield 5.8% on today's 226p shares -- and with only a 1% EPS gain penciled in for 2017, they're expecting a further dividend boost to 6%.
That would give us dividend cover of around 1.3 times this year, dropping to 1.26 times next. Again, I find that cutting it a bit fine, and Centrica has made less of a commitment to dividend growth having merely said in February's full-year report that its progressive dividend policy is "tied to confidence in underlying operating cash flow".
Again, probably safe, but by no means certain.
The National Grid(LSE: NG) share price has bucked the trend, being the only one that has gained in the past 12 months -- albeit a modest 8% to 947p. The potential dividend yield is the lowest of the three, with a relatively modest 4.5% (still way ahead of the FTSE 100 average) expected for the year to March 2016, blipping up a little to 4.7% by 2018.
But the nice thing is that National Grid's dividend should be a bit better covered than the other two, with the 5% EPS rise forecast for this year taking it to 1.4 times. Admittedly, the next two years with a suggested EPS rise of only 2% in total would drop that cover to 1.35 times, but that would still be ahead of the pack.
National Grid's dividend is probably the safest of the three, but the lesson that we should not be complacent is a welcome one.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.