Why HSBC Holdings plc & Unilever plc are my top dividend stocks for 2018

With few exceptions, the years since the financial crisis have been largely unforgiving for income-focused shareholders in the UK's largest listed banks. However, nearly a decade on, several of these globe-spanning financial institutions are finally beginning to return to their big dividend ways of before the financial crisis.

And at the top of my list is HSBC(LSE: HSBA), which currently kicks off a 5.2% yield that is nicely complemented by a whopping $2bn share buyback programme that is nearly completed after being announced in June of last year.

Unlike peers such as Barclays or RBS that are still paying out miserly dividends, if any, HSBC is able to return gobs of cash to shareholders for several reasons that I believe will stand the bank in good stead for 2018 and beyond.

First up is a healthy capital position with a Q3 CET1 ratio of 14.6% that exceeds regulatory mandates and has enabled management to return excess capital to investors. The second is a strong position in Asia, a market that is rapidly growing and driving demand for the retail and commercial banking HSBC provides.

This, together with a more rapid cost-cutting programme than rivals, has helped push the bank's regulatory return on equity (RoE) up to 8.2% through the first nine months of 2017. This is still far below the RoE banks were posting in the years before the financial crisis, but it's still a healthy figure that is growing and is already well ahead of rivals.

With the bank's capital position secure and margins rising, HSBC's bumper dividend yield makes it one of my top FTSE dividend options for 2018.

A more traditional option

But for investors who are still rightly skittish about investing in UK financial institutions, I reckon Unilever(LSE: ULVR) may prove a more palatable income option. With the Anglo-Dutch giant's stock price up over 23% in the past year, its dividend yield of 3% may not raise many eyebrows. But for more risk-averse investors, the consumer goods giant's payouts looks to be about as safe as they come.

And on top of the company's dividend yield, management is also returning cash to investors via a EUR5bn share buyback programme. It has just completed but is likely to resume in the future barring any attractive acquisition targets appearing. Furthermore, investors should expect another windfall soon. The company just sold its collection of spreads brands for EUR6.825bn and expects to return the net proceeds to shareholders.

Looking forward, I see good reason to expect Unilever's income prowess to continue to grow as the firm's management has set ambitious but achievable sales and margin growth targets that are already boosting cash flow.

A hefty chunk of this rising cash flow is wisely being spent on acquiring up-and-coming brands to add to its portfolio, but there is still plenty left over to fund increasing shareholder returns.

Unilever may not be an exciting stock, but the firm's proven management team, strong global position and rising cash flow make it one of my top FTSE 100 income stocks of the new year.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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