Neil Woodford's head of investment communications recently wrote in a company blog: "Last year was a year of capital risk ... The UK equity market remains volatile in capital terms, but this year will increasingly become one of dividend risk, in our view".
Woodford has never been one for chasing risky, high dividend yields at the best of times, but his approach seems particularly relevant in the current environment of low interest rates and low inflation. If you don't trust the super-high yields of companies such as BHP Billiton -- and I don't blame you if you don't -- you may be more interested in the stocks Woodford has picked "with the aim of delivering consistent and dependable dividend growth for several years to come".
AstraZeneca(LSE: AZN) is the second-largest holding in Woodford's equity income fund, and his biggest in the pharmaceuticals sector. Like other big pharma firms, Astra is going through a phase of patent expiries on some of its best-selling drugs. During this lull, the company has paid the same $2.80 annual dividend, and 2016 is unlikely to be any different.
However, the future for dividend growth is set to be brighter thereafter. Astra has refocused its business and has a robust pipeline of new products. Woodford said -- when supporting Astra's rejection of a 5,500p bid from Pfizer in 2014 -- "we expect significant value creation over the next 3 to 5 years as this strategy bears fruit".
As things stand, Astra offers a yield of 4.8%, based on a current share price of 4,078p and the prevailing dollar/sterling exchange rate. With dividend growth set to return in the coming years, and the shares trading at a 26% discount to the Pfizer offer price -- which Woodford reckoned "significantly undervalued AstraZeneca and its prospects" -- now could be a great time to buy this blue-chip stock.
At no. 5 in the Woodford equity income fund, BT(LSE: BT-A) is the master investor's largest holding outside of the pharma and tobacco sectors.
Woodford supports BT's strategy of expanding beyond fixed line and broadband with its move into pay-TV, and the acquisition of mobile firm EE. BT is now well-positioned to exploit the 'quad play' market, which looks to be the future. Woodford's team said of BT just last week: "We are very confident that this business will continue to deliver attractive levels of dividend growth from here".
A yield of 3% at a current share price of 462p is relatively modest, but combined with the attractive levels of growth Woodford's expecting, could reward investors, while some higher-yielding companies' dividends disappoint.
Imperial Brands(LSE: IMB) -- the recently re-named Imperial Tobacco Group -- is Woodford's biggest holding.
The name may have changed, but the dividend policy hasn't. The board has an explicit commitment to "growing dividends by at least 10% per year over the medium term". Woodford told us last week that he believes Imperial is "more than capable of achieving that".
Imperial's shares are trading at 3,750p, giving a forward yield of 4.1%, which, combined with the dividend growth policy, looks a very attractive proposition to me in one of the most defensive sectors of the market.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.