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The UK stock market may have bounced back strongly from the tariff-induced sell-off last month, but there are still plenty of quality stocks offering impressive dividend yields.
Dividend sustainability
One rule I never break is that I won’t buy a stock simply on the basis of a blockbuster dividend yield. Yields north of 10% particularly make me nervous. In my experience, such headline-grabbing returns almost never last. Indeed, more often than not, they are a sign of a distressed company.
One stock that I continue to give a wide berth to is Vodafone. The only reason the yield has been increasing is because the share price kept falling. It didn’t surprise me at all when the business cut the dividend in half from 2025.
Beyond the FTSE 100
One stock that has been on my radar for sometime is FTSE 250 asset manager aberdeen (LSE: ABDN). Last month’s sell-off pushed the yield to an eye-popping 11.6%.
Now, I know this seems to contradict what I said above, but I am extremely confident that the business is able to sustain its payouts.
Over the past month, a 20% increase in the share price has pushed the yield down to 9.4%. Dividend cover sits at only 1.2 times earnings, which is below my preferred cover of two. The business has made it clear that dividend per share (DPS) won’t increase until the number hits 1.5 times.
This is a business with a clear path to long-term growth. interactive investor, its direct-to-consumer offering, continues to witness net inflows and customer growth. SIPP accounts grew 8% last year. As more individuals take control of their financial future, I can only see the platform’s popularity increasing.
The company has suffered with net outflows from its funds for a number of years now. That tide looks to have been stemmed. Nevertheless, should heightened volatility in markets become the norm, customers may decide to park their money in less risky instruments.
Oil major
Another business I continue to buy shares of at every opportunity is BP (LSE: BP.) There is a lot of talk at the moment about the potential buyout of the company by bigger rival Shell. Personally, I remain sceptical. Nevertheless, such speculation is hardly a reason to either buy or sell a stock, in my view.
Hargreaves Lansdown customers have been piling into the stock recently. Little wonder with a dividend yield of 6.6%. It expects DPS to grow by 4% annually.
Following a retreat from renewables, the business is putting oil and gas operations at the centre of its strategy. It has already commissioned 10 major projects, including the exploration of the massive oil and gas fields of Kirkuk, Iraq.
A major risk for the company in the short term remains the possibility of a recession and a sustained bout of low oil prices. But this is a risk for every one of the oil majors.
The turnaround won’t happen overnight, but I have plenty of patience. The whole of the industry is so cheap at the moment that it feels like 2020 all over again. With inflation remaining stubborn and gold prices soaring, oil will eventually move in a big way too. And as a laggard, BP will be the stock with the greatest recovery potential.
