For income investors, looking at the dividend yield of a stock is only half the story. The yield takes into account the dividends paid over the past year, not the dividend forecasts for the next year. Even if the yield for some stocks isn’t that high, strong dividend forecasts can still make me want to buy for long-term potential.
Back in vogue
Marks & Spencer (LSE:MKS) has enjoyed a stellar year, capped off with being promoted back to the FTSE 100. The share price has almost doubled over the past year.
In the half-year results, profit before tax and adjusted items jumped by 75% versus the same period last year. In part, this helped the reinstatement of a dividend from the firm, of 1p per share.
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This is the first dividend paid since 2020 and marks the start of what I believe to be a strong dividend run in coming years. The forecast is for a dividend of 2p with the full-year results in February, along with a 2.9p payment with the half-year results. The total figure of potentially 4.9p is a huge jump from the 1p.
Granted, even with this jump in the dividend forecast, the yield isn’t likely to rise above the FTSE 100 average. Yet this is one to watch for the long-term prospects even beyond 2024.
I need to be careful as inflation and the cost-of-living crisis could dampen revenue as customers cut back on spending. Yet M&S has so far been able to ride this risk out well in 2023.
Standing alone
Haleon (LSE:HLN) was spun out of the pharma giant GlaxoSmithKline (now GSK) back in July 2022. Since then, it has been doing well, with the share price up 16% over the past year.
It’s still early in building a track record of dividend payments. However, by comparison to the 2.4p and 1.8p payments from the past year, 2024 looks a lot better. The current forecasts for 2024 are for payments of 3.7p and 2.1p, totalling 5.8p. This would be a 40% jump.
This jump makes sense when I look at the financial results for so far this year. In November, the trading update showed revenue up 8% year-to-date versus 2022. For the full-year, adjusted operating profit growth is expected in the 9-11% region.
These numbers might not sound huge, but it’s key to remember that sector is mature. Sure, I believe it’ll continue to grow over the next decade, but this isn’t an area booming like artificial intelligence (AI). So the percentage growth figures from Haleon are actually very strong in comparison to the rest of the sector.
As a risk, I’m aware that the pharma sector is a tough area to stay in, given the established nature of existing companies. This is something Haleon needs to factor in to the future strategy plans.
I’m estimating the dividend yield to be slightly below the FTSE 100 average next year for Haleon, even with a 40% jump in the dividend per share. Yet I think this yield has the potential to rise significantly when looking out over the course of the next five or 10 years.
I’m considering adding both stocks to my portfolio for the future.
