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When researching dividend stocks to buy, I think it's important to strike a balance between high yields and reliability. Earnings coverage, a strong track record, and good cash flow help ensure dividends are paid.
Consider the following two popular UK companies: ITV (LSE:ITV) and HSBC (LSE:HSBA).
One of the main British broadcasters
Who doesn't love ITV? Corrie, Love Island, Misomer Murders – it's got it all. As one of the UK's largest media networks, it produces and broadcasts engaging content through its ITV Studios and Media & Entertainment segments.
With a share price of 70p and a market capitalization of £2.8bn, it's right in the middle of the FTSE 250 – and up. Its balance sheet is solid and has considerable debt coverage. A debt-to-equity ratio of 42.6% is backed by £323m in operating income and £340m in cash, more than enough to cover its interest payments.
But like any company, ITV is not without risks. While the broadcaster has done well in the transition to digital broadcasting, it faces stiff competition from companies such as Netflix and amazon. It lacks the Hollywood-style budget to compete with these large American entities, and advertising revenue from traditional broadcasting is drying up. In the event of an economic downturn, profits could fall if users prioritize basic survival over ITVX's ad-free premium subscription fees.
But what interests me most about this stock is the dividend yield of 6.9%. I already own ITV shares, so I'm already excited about the 3.3p dividend which was confirmed to be paid on 23 May. Although the payout ratio is quite high (96%), ITV has more than enough free cash flow to cover it. And aside from the cut during Covid, dividends have been paid consistently for a decade.
That checks the reliability box for me.
A leading British banker
HSBC (LSE:HSBA) is another top-tier dividend payer that has served me well recently. Like ITV, Covid disrupted its reliable and consistent payment schedule. However, it took a little longer to get back on track, as it only made two regular payments instead of the usual four 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 figure jumped again to 7.8% in the first quarter of 2024, but has since returned to 7%. However, analysts predict that the dividend yield will continue to rise, possibly reaching 9% in 2025.
However, remember: dividends are generally implemented as an incentive to invest. The implication is that investors might look elsewhere if it weren't for the dividend. I think this is particularly true for bank stocks, especially considering the reputational fallout from the 2008 financial crisis.
Needless to say, the banks didn't exactly win over the public during that debacle.
In today's unstable economic climate, those same risks are keeping cautious investors at bay. This may be one of the reasons why banks pay such attractive dividends. Therefore, it is worth carefully evaluating economic conditions and individual risk appetite when considering investing in banks.
Personally, I like HSBC because its international reach means it is less exposed to localized risks. Some banks make people want to point fingers at them, but HSBC gets a solid thumbs up from me.
