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3 cheap FTSE 100 dividend stocks I’d buy and hold for the next 5 years

Paul Summers
Various denominations of notes in a pile

Last week, I covered three FTSE 100 stocks that I’ll be continuing to avoid for the foreseeable future, partly due to their currently unsustainable dividend payouts.

Today, I’m doing the reverse and looking at three large-cap peers that I’d feel more comfortable investing in, particularly if generating income was a priority.

Secure income

Shares in defence giant BAE Systems (LSE: BA) haven’t exactly been on scintillating form of late. Following a fairly rotten second half of 2018, they’re now priced 27% below the peak of 676p hit last July.

Nevertheless, I think now could be a good time for new investors to get involved. 

The consensus from analysts is that BAE will grow earnings by 26% in 2019, which leaves the stock trading on a P/E of just over 11. Although defence spending tends to be fairly lumpy, that looks pretty reasonable to me. 

In contrast to some in the FTSE 100, BAE’s dividend payouts look safe too. A likely 23.1p per share return in 2019 gives a yield of 4.5% at the current share price. Plenty of blue-chip companies offer more, but only if you’re prepared to accept the higher likelihood of these cash returns being cut or scrapped completely in the future. 

It’s also worth mentioning that BAE consistently hikes its bi-annual dividends — something that the aforementioned big payers generally can’t/won’t do. 

Another top-tier constituent whose income credentials and low valuation make it a relatively low-risk, long-term buy (at least in my opinion) is packaging firm DS Smith (LSE: SMDS).

Like BAE, its shares offer a 4.5% yield, easily covered by profits. Like BAE again, DS Smith is a consistent dividend hiker. No stagnant cash payouts here.

At 10 times earnings (based on an expected 48% rise to EPS for the full year), the shares are surely close to bargain territory, having already fallen some way from the 539p hit back in June last year.

One recent development at DS Smith that I particularly like is the reduction in net debt following the disposal of its plastics division to private equity firm Olympus Partners.

The sale, when combined with the recent acquisition of Europac, will also help the company to “reinforce” its market position in sustainable packaging, according to CEO Miles Roberts.

Trading since November has “continued to be strong” in the company’s view and in line with management expectations.

A third and final income candidate from the FTSE 100 that I think continues to warrant further inspection from investors is insurance firm Aviva (LSE: AV), despite its share price underperforming those of peers Legal and General and Prudential for many years.

Following an extended period of uncertainty, the appointment of new leader Maurice Tulloch in March (and the suggestion that the company could put more focus on its home market under his stewardship) could act as a catalyst for a sustained recovery in the shares. 

What’s more, the valuation remains appealing. At the time of writing, Aviva’s stock changes hands for just 7 times earnings and yields 7.4% — the highest of my picks today — covered 1.9 times by expected profits. 

Naturally, there’s no guarantee of anything in the stock market and this includes Aviva’s generous cash returns.

As such, it’s vital to ask whether your income portfolio is sufficiently diversified by sector and geography before leaping to buy any share.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. 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.

Motley Fool UK 2019