AstraZeneca plc, BAE Systems plc And Imperial Brands PLC Show Great Dividend Potential

Updated: 
Photo credit: Rafael Matsunaga. Licence: http://creativecommons.org/licenses/by/2.0/

Very high dividends are great, but if they're pushing the limits of a company's earnings or dragging down its balance sheet then they're always at risk of a cut. The most recent major casualty has been Barclays, which has decided to slash its 2016 dividend by more than 50%.

I reckon the best approach is to look for progressive dividends that have great long-term potential rather than today's risky highest flyers, and I see one just like that in AstraZeneca(LSE: AZN).

Prudent dividend cover

AstraZeneca has been through a period of falling earnings as the loss of some lucrative patents expired and competition from generic drugs has intensified. But thanks to its prudence in having kept its dividend very well covered in the good times, there has been enough headroom to keep the payments going. The dividend has been kept flat since 2011, but still yielded 4.3% in 2015, and that seems like a solid one to me.

Although there's a further modest drop in earnings per share forecast for the current year, 2017 should be the pivot year that turns AstraZeneca back into earnings growth, and analysts are expecting the dividend to be held steady for the two years -- and it would still be covered around 1.4 times, which seems adequate if not ideal. With the shares at 4,059p, we'd see a yield of 4.8%.

At 2015 results time, the company reaffirmed its commitment to a progressive dividend policy, so we should be seeing a return to dividend rises in the not-too-distant future.

Profit from defence

BAE systems(LSE: BA) might not be everyone's top pick for dividends, but with a yield of 4.2% it's easily beating the FTSE 100 average of around 3%, and it's been keeping pace with inflation in recent years. Earnings have been a bit erratic since the global slowdown has put a cap on defence spending, and the shares are down 9% since last March's peak, to 502p. But over five years we've seen a 55% rise against a pathetic 5% for the FTSE, so BAE is beating the index on that score too.

What's really important for reliable dividends is that cover by earnings looks comfortable at a close to two times. The firm's policy is very much in line with the needs of steady income seekers too, after we heard at results time that it "plans to pay dividends in line with its policy of long-term sustainable cover of around two times underlying earnings and to make accelerated returns of capital to shareholders when the balance sheet allows".

Cash and growth

If you're looking for a share that can provide strong capital growth in addition to progressive dividends, Imperial Brands(LSE: IMB) might fit the bill. The purveyor of the deadly weed has recently changed its name from Imperial Tobacco, and though that might make its name seem less horrid, there's no need to disguise its market performance -- the share price has put on 48% in just two years, rising  to 3,688p, which is a handy bonus for those buying for income.

Last year's dividend provided a yield of 4.1%, covered 1.5 times, and with earnings forecast to keep on rising we have dividend yields of 4.2% and 4.6% forecast for this year and next -- motoring along well ahead of inflation. And again, Imperial Brands has a progressive dividend policy, speaking at results time of its "commitment to growing shareholder returns".

It's hard to beat the idea of putting your money into strong dividend-paying companies like these, which have the potential to lift your income year after year. Our newest report, A Top Income Share From The Motley Fool, reveals a company that might just fit that bill.

It's a company with a market cap of around £500m, so it's not a high-risk tiddler, and dividends have been growing very strongly over the past few years.

Want to know more? Click here to get your completely free copy of the report delivered to your inbox today.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca and Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.