Top UK Dividend Stocks For International Income

This is a guest post from The Investor, the publicity-shy blogger who writes about money and finance on Monevator.  If you like this post, why not subscribe to his free RSS feed for similar posts on money and investing topics?  You may also follow him on Twitter @Monevator.

In a previous post, I outlined the attractions of the UK stock market for overseas income seekers. Now I’d like to suggest a portfolio of 10 UK shares that pay a decent and sustainable looking yield.

Note that when I consider buying high-yield shares for their dividends, I personally prefer to see a high and preferably rising dividend payout, rather than a low one that I expect to rise very significantly in time. The reason for this is that I can buy a UK FTSE 100 index tracker paying me a yield of 3.6% that’s very likely to grow.

If I’m going to deviate away from just tracking the market, I prefer when income investing to look for a decent historic and forward yield from a big ‘blue chip’ company, rather than start predicting that a smaller company with a lesser payout will be able to keep growing its dividend for years to come and so eventually catch up.

There are so many upsets in the stock market, I’d rather take my money now than hope for jam tomorrow!  I fully accept others follow a different strategy and respect their thinking, but do keep in mind that that is my criteria in selecting the shares below: decent payouts now that look unlikely to be cut, rather than a lot of guesswork about the future.

With no further ado, here’s ten big companies I like for yield (all figures taken from the August 27^th 2009 edition of the Financial Times).

7 magnificent UK stocks to buy for dividend yield

BP (NYSE: BP)
Yield: 7.3%

Once the state-owned British Petroleum, BP is an oil major with an amazing yield. Like all oil majors there are worries about its future reserves, but its cashflow and relatively low debt mean it should be able to hold its dividend for several years if required until oil prices spike up again.

British American Tobacco (AMEX: BTI)
Yield: 4.7%

Personally I don’t invest in tobacco companies, but most income investors I know do, and no wonder – British American Tobacco has doubled its yield over the past five years, an incredible achievement for a £37 billion company that’s second only to Philip Morris in the world’s cigarette sector.

Glaxosmithkline (NYSE: GSK)
Yield: 4.9%

Glaxo is the world’s second largest pharmaceutical company, and it has offered an excellent dividend yield for many years that has drifted up even higher recently on fears about US President Obama’s health care reforms as well as recurrent patent fears. Lots of products in the pipeline.

Halma (OTC: HLMAF, HLMAY)
Yield: 4.1%

Smaller than the other companies I’ve listed, Halma is dominant in its field of safety-equipment and sensors, which I think gives it a fairly defensible moat against competition. The company is very cleverly organised, and management has increased the dividend payout for 30 years in a row.

Scottish and Southern Electricity (OTC : SSEZY, SSEZF)
Yield: 5.9%

There are lots of UK utilities offering the great yields traditional for the sector. Scottish and Southern is my favourite because management focuses on delivering shareholder value and growing income, but not to the detriment of investing in the future – it’s big into UK windfarms, for instance.

Tesco Plc (OTC : TSCDF, TSCDY)
Yield: 3.2%

Tesco is the UK’s answer to Wal-Mart and its management is just as impressive. Utterly dominant in the UK, it is now expanding overseas, from India and China to a high-profile, low-risk (and so far no reward) push into the US. I’d argue it’s the best company in the UK (Buffett holds!), which makes up for the lower yield than the others here.

Vodafone Group PLC (NYSE: VOD)
Yield: 5.8%

The biggest telecoms company in the world with a market cap of £75 billion, Vodafone started diverting its massive cashflow into dividend payments a few years ago and shows few signs of slowing down. Debt is less of a worry than it was; making up for maturing markets with growth in emerging territories is its big challenge.

Enjoy the Yield, or Diversify

Invest equal portions into my magnificent seven high yielders and you could enjoy a portfolio income of 5.1%.  Holding just seven stocks is risky though, although I suspect that for most MoneyEnergy readers, your UK allocation will be a small part of your overall mix.

If you’re nervous, I’d consider taking advantage of the UK market’s overall decent yield of 3.6% to hold 50% in a UK FTSE All-share tracker, and 50% in my suggested portfolio of seven high yield stocks.  This way you get a very decent average yield of 4.35% now with a good chance of a bit of excess capital and income growth from the All-Share in the future.

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Tagged as: BP, Glaxosmithkline, Halma, Tesco, UK dividend stocks, UK FTSE 100 index tracker, UK FTSE All-share tracker, UK stocks, Vodafone