Royal Mail: A FTSE Dividend Share For Your ISA?
Jack Brumby | Apr 26, 2019 13:02
Some of the very best UK-listed companies can be found on the FTSE 350. These companies have often been paying dividends for a very long time, making them prime candidates for a tax-efficient ISA account.
UK stocks paid out an eye-watering £100 billion in dividends last year, and the bulk of that cash came from the biggest and best-known companies in the FTSE 350 - including Royal Mail (LON:RMG).
There are various ways of finding blue chip dividends, but here is a strategy with some basic rules to put you on the right path to finding the best dividend stocks in the FTSE 350. Let’s look at the Royal Mail dividend as an example of how it works.
h2 Four rules for finding dividend share/h2
1. High (but not excessive) dividend yield
Yield tells you how much a company pays out in dividends each year as a proportion of its equity. High yields are obviously appealing, but caution is needed. A high yield can be the market's way of saying it is expecting a dividend cut, so it pays to be wary of excessive yields.
- Royal Mail has an eye-catching dividend yield of 9.45%. This seems attractive but is also the kind of level that suggests skepticism with regards to its sustainability.
2. Safety in size
Part of the appeal of FTSE 350 dividend stocks is their financial strength. Large size and scale means that their vast cashflows tend to be predictable. It gives them the resilience to maintain their dividends through the economic cycle. And while large companies aren’t immune from making dividend cuts, their financial strength is an appealing safety factor for income investors.
- Royal Mail is an adventurous, large cap in the Air Freight & Courier Services industry and has a market cap of £2,515m
3. Dividend growth
Another important marker for income investors is a track record of dividend growth. Progressive (NYSE:PGR) dividend growth can be a pointer to payout policies that are being handled carefully by management. Rather than aggressively dishing out earnings, dividend growth companies tend to have more modest yields, but are better at sustaining their payouts.
- Royal Mail has increased its dividend payout 4 times over the past 10 years.
4. Dividend cover
Attractively high yields obviously turn heads - but it’s important to know that a dividend is affordable. Dividend cover is a go-to measure of a company's net income over the dividend paid to shareholders. It’s calculated as earnings per share divided by the dividend per share and helps to indicate how sustainable a dividend is.
Dividend cover of less than 1x suggests that the company can’t fund the payout from its current year earnings.
- Royal Mail has a dividend cover of 1.13.
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The analysis above presents a mixed bag. Royal Mail shares are cheap on the face of it, but quite often cheap shares are that way for a reason. A quick look at the share price chart paints an unhappy picture for shareholders:
You could argue that Royal Mail's business model faces an existential threat in the form of the internet and Amazon (NASDAQ:AMZN). Picking up its shares at these levels might bag an impressive dividend yield, but it is possible that this dividend could get cut should management decide that cash is better used elsewhere in the business.
h2 Next steps/h2With these four dividend rules, you can track down large-cap high yield shares with a record of growth and safety. On this basis, Royal Mail could be worth a closer look.
To find out more you might want to take a look at the Royal Mail StockReport from the award-winning research platform,
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.
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