With have applied a screener to FTSE 100 constituents and identified Shell, Barclays and Smurfit Kappa as high-quality, high-yielding dividend considerations.
For a company to be considered for this selection, we feel they have to pass four stringent criteria:
- Yield more than the FTSE 100 average (3.55%)
- Dividend covered more than 2.5x
- Increased full-year ordinary dividend three years in a row (excluding the pandemic)
- The free cash flow yield is higher than the dividend yield
Many companies have a high yield, but not all will be sustainable, and some will slash their dividends. Not only will this reduce income from the investment, but the stock will also likely be dumped out of portfolios, leading to a potential capital loss.
To ensure the quality of this selection of dividend payers, only companies with dividends covered more than 2.5x by earnings make the cut. In addition, we like to see a progressive dividend policy and steadily increasing ordinary dividends. Companies are forgiven for conserving cash during the pandemic by pausing dividend payouts.
Only a handful of London’s leading index 100 constituents meet our screening criteria. The three we highlight today are:
- Shell (LON:SHEL)
- Smurfit Kappa (LON:SKG)
- Barclays (LON:BARC)
Shell (LON:SHEL)
Shell dividend yield: 3.6%
Shell dividend cover: 5.4x
Shell free cash flow yield: 20.9%
Although Shell’s dividend is very close to the FTSE 100 average, it is very well covered and leaves plenty of potential for dividend hikes in the coming years. Shell is also highly cash generative and has a substantial buyback programme.
Smurfit Kappa (LON:SKG)
Smurfit Kappa dividend yield: 4.3%
Smurfit Kappa dividend cover: 3.2x
Smurfit Kappa free cash flow yield: 5.6%
Smurfit Kappa has produced consistently higher revenues and profits in recent years, supporting a sustainable dividend policy. The packaging manufacturing company reported a 13% jump in EBITDA in the first quarter of 2023.
Barclays (LON:BARC)
Barclays dividend yield: 4.5%
Barclays dividend cover: 5.3x
Barclays free cash flow yield: 113x
Barclays’ recent Q1 2023 update demonstrated resilience through March’s banking mini-crisis as the UK bank saw profit before tax jump and deposits remained unaffected by the turmoil elsewhere in markets.