When researching dividend shares to buy, I think it’s important to strike a balance between high yields and reliability. Earnings coverage, a solid track record, and good cash flow help to ensure dividends get paid.
Consider the following two popular UK companies, ITV (LSE:ITV) and HSBC (LSE:HSBA).
A top British broadcaster
Who doesn’t love ITV? Corrie, Love Island, Misomer Murders – it’s got it all. As one of the largest media networks in the UK, it produces and broadcasts captivating content via its ITV Studios and Media & Entertainment segments.
With a 70p share price and a £2.8bn market cap, it’s smack bang in the middle of the FTSE 250 – and rising. Its balance sheet is rock-solid with considerable debt coverage. A debt-to-equity ratio of 42.6% is supported by £323m in operating income and £340m in cash, more than covering its interest payments.
But like any company, ITV is not immune to risk. While the broadcaster has done well to transition to digital streaming, it faces tough competition from the likes of Netflix and Amazon. It lacks the Hollywood-style budget to compete with these large US entities, and advertising revenue from traditional broadcasting is drying up. In the event of an economic downturn, profits could fall if users prioritise basic survival over ITVX’s no-advert premium subscription fees.
But what most interests me about this stock is the 6.9% dividend yield. I already own ITV shares, so I’m already excited for the 3.3p dividend that’s confirmed for payment on 23 May. Although the payout ratio is quite high at 96%, ITV has more than enough free cash flow to cover it. And other than the cut during Covid, dividends have been paid consistently for a decade.
That ticks the reliability box for me.
A top British banker
HSBC (LSE:HSBA) is another top-class dividend payer that has served me well recently. Like ITV, its reliable and consistent payment schedule was interrupted by Covid. Yet it took a bit longer to get back on track, making only two rather than the standard four regular payments in 2021 and 2022.
But in 2023, it came back strong, reinstating quarterly payments and raising its dividend from 4.5% to 6.9%. This made a further jump to 7.8% for the first quarter of 2024 but has since returned to 7%. However, analysts predict the dividend yield will continue to rise, possibly reaching as high as 9% in 2025.
Remember, though – dividends are usually implemented as an incentive to invest. The implication is that investors may otherwise look elsewhere if it weren’t for the dividend. I think this is particularly true for bank shares, especially considering the reputational fallout from the 2008 financial crisis.
Needless to say, banks didn’t exactly win the public over during that debacle.
In today’s rocky economic climate, those same risks keep wary investors at bay. This may be one of the reasons banks pay such attractive dividends. So it pays to carefully evaluate economic conditions and individual risk appetites when considering investing in banks.
Personally, I like HSBC because its international reach means it’s less exposed to localised risk. Some banks make people want to hold a finger up to them, but HSBC gets a solid thumbs up from me.
The post With impressive 7% dividend yields, I’d seriously consider these 2 popular British shares to buy in May appeared first on The Motley Fool UK.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Mark Hartley has positions in HSBC Holdings and ITV. The Motley Fool UK has recommended Amazon, HSBC Holdings, and ITV. 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.
