One of the investment themes which I’m focused on in 2016 is dividends. Sure, US interest rates have risen by 25 basis points and further rises could lie ahead, but their pace of increase was already likely to be slow to say the least. Now that there is an outpouring of fear among investors over China and the state of the global economy, interest rate rises in the US could be snail-paced.
Here in the UK, interest rate rises keep being pushed back, with the Bank of England seemingly in no rush to make my savings accounts more appealing. With inflation being just 0.2% last month, who can blame them and in my opinion until the price level starts to rise at a much, much faster rate, low interest rates are here to stay for 2016 and over the medium term.
That’s why I’m bullish on high yield stocks. I think that dividend yields will become increasingly popular in the coming months and that’s a big reason why I steadily bought them throughout 2015.
One example which has a place in my portfolio is Aviva plc (LON: AV). I’m a huge fan of turnaround companies and even though Warren Buffett is alleged to have said that ‘turnarounds rarely turn’, Aviva is an example of a company which was undergoing a hugely difficult period but is now seemingly back on track. It has been able to achieve this through a new strategy which has disposed of non-core assets, cut costs and now is aiming to dominate the life insurance market via the tie-up with Friends Life.
With Aviva having a historic yield of 4.5% and headroom to bolster this in future years due to the insurer having a dividend coverage ratio of 2.1, I’m optimistic about the prospects for Aviva and its dividend.
Similarly, car insurer Admiral Group plc (LON: ADM) is another high-yield stock which I’m bullish about. In the 2015 calendar year it paid £1 per share in dividends and this works out as a yield of 5.9% at its current share price. Sure, 52% of that dividend was made up of specials, but with Admiral having a dominant position within the car insurance space, it could continue to offer above average earnings growth.
In fact, in the last four years Admiral has grown its earnings per share (EPS) by 9% per annum which, for an insurance company, is mightily impressive in my view. I’m less of a fan of its P/E ratio of 17.2, but it’s the yield rather than rating prospects that appeal to me.
Also helping to boost my portfolio’s income is Direct Line Insurance Group PLC (LON: DLG). Like Admiral, Direct Line pays special dividends and in the 2015 calendar year they amounted to 31.5p per share, or 8.5% of Direct Line’s current share price. Add to that the 13.4p of ‘normal’ dividends and Direct Line paid over 12% of today’s share price in dividends in the calendar year 2015.
Of course, there is no guarantee that special dividends will be paid at all in future and besides, 2015’s figure was skewed by a huge one-off payment when Direct Line disposed of its international operations. But, with the company’s shares having a prospective yield of over 5% and trading on a P/E of 13.2, I think it’s still a top notch income play.
The author owns shares in Aviva, Admiral and Direct Line at the time of writing.