Dividend of the Week

Falling share prices drive up yields and make stock selection easier. This has led us to have a look at some of the upcoming declared dividends to see if the recent sell-off in the markets has revealed any short-term dividend capture opportunities.

This week we are going to concentrate on the UK, using the DividendMax countdown tool to focus on the current high-yielding short-term dividend grabs. Initially, we are filtering for all the FTSE 350 stocks that have declared their next dividend. This reveals that, post-results season, around 50 companies have declared their dividends. The countdown tool gives the yield of the dividends concerned as a straight percentage of the current price, which allows us to eliminate all of the stocks with a yield of less than 2 per cent.

The long list is:

Balfour Beatty (BBY), Close Brothers (CBG), Galliford Try (GFRD), Smiths Group (SMIN), Micro Focus International (MCRO), Go-Ahead Group (GOG), Ashmore Group (ASHM) and British Sky Broadcasting (BSY).

Let's have a look at their recent share price history:

We can immediately eliminate British Sky Broadcasting as this has already been highlighted as a dividend of the week (Dividend of the Week, 5 Aug 2013).

Given that we are looking for stocks that have retreated considerably from recent highs, we also exclude Close Brothers, Galliford Try and Go-Ahead Group. We are also going to eliminate Balfour Beatty at this stage as it goes ex-dividend on 9 October. We prefer to be a good few weeks out, before people start coming in for the dividend.

The remaining companies are Smiths Group, Micro Focus and Ashmore Group.

At this point we can look at the fundamentals:

*Includes special dividend **Return of value 'D' share scheme.

What are the brokers saying about the three survivors? The table below represents the number of brokers in each of the recommendation categories of buy, hold and sell:

This leaves us with an interesting and varied selection of a fund manager, an IT software company and an engineering company and, if the brokers are to be believed, Ashmore looks like the top choice.

Let's have a look at their recent dividend histories:

Micro Focus International

NB: 2013 return of value of 60p.

Smiths Group

NB: 2013 final dividend of 27p goes ex on 23 October along with a 30p special dividend.

Ashmore Group

NB: 2013 final dividend 11.75p declared, goes ex-dividend 6 November

With solid track records in recent years, we expect that all three companies intend to continue increasing their dividends barring any trading mishaps.

As with previous dividends of the week, we are left with a difficult choice. Ashmore Group is a specialist emerging markets asset manager that has performed very well even in the face of recent turmoil in the emerging markets. It has been a solid performer and its optimised yield over the next three dividends is creeping close to 7 per cent. Its shares have held up reasonably well in recent weeks despite concerns over emerging markets growth, but should these concerns become longer-term trends then there is the risk of further weakness in the share price.

Micro Focus has been a dividend paying powerhouse for some years and this is set to continue, with the company indicating its intention to ramp up shareholder returns over the next year or two. Indeed, Micro Focus recently announced a "return of value" to shareholders amounting to 60p a share on top of the normal dividends for the year. This will be executed by issuing 'D' shares and the return of value can be taken in the form of income or capital or a combination of the two.

Smiths Group has seen its share price dip very recently as the political impasse over the US budget has heightened risk aversion towards companies with exposure to US government spending. Nonetheless, Smiths recently announced an increase in its final dividend coupled with a special dividend of 30p a share making a total of 57p, going ex-dividend on 23 October. Smiths is a very reliable performer but its shares have fallen back since the dividend announcement to 1,343p. The upcoming dividend of 57p represents a return of 4.2 per cent and looks a little easier to come by in terms of administration than the Micro Focus return of value, which requires shareholders to elect how they receive the return.

A tough choice as always and investors could do well in any of the final three stocks, but we believe that Smiths Group offers the best option of a solid cash return to investors in the short term. Set against a backdrop of uncertainty in the US, now may not be the time to buy, but with increased volatility as the game of political hardball there unnerves investors, an opportunity to pick up these big dividends at even lower prices may well emerge over the next week or so.

It is worth noting that investing close to the ex-dividend date always represents something of a risk as the share price of a company that has declared a decent dividend is always likely to fall back in the few trading days following the ex-dividend date, although not always by the level of dividend declared. In some cases, this fall in the share price is often recouped within a few weeks of trading, although this is not guaranteed.