Dividend of the week

We are going to use the DividendMax Optimizer tool to screen the global equity markets for stocks with an annualised yield of greater than 6 percent, a record of consecutive annual dividend increases (CADI) of more than five years and with safe dividend cover greater than one. The initial results reveal 17 companies, of which two are Spanish and one is French. This once again illustrates how spoilt we are for dividends in the UK. True, some American companies such as tobacco giant Altria made the cut on the strength of their yield, but were eliminated on the CADI criteria as it only has a track record of three years of consecutive increases. Williams Companies Inc and AT&T also very narrowly missed the cut with annualised yields of 5.98 per cent and 5.95 per cent respectively.

To further reduce our list to a manageable number, we first eliminated all of those that have been previous dividends of the week over the past four months. This is the last time that we will eliminate previous dividends of the week from our analysis as sufficient time has now elapsed for us to look again at some of our earliest choices. Next week we will review of all of our past choices and see how they have performed and whether any are still offering compelling value.

So the former dividends of the week eliminated from this week's long list are Catlin, Admiral, AstraZeneca, Carillion, Smiths News and Vodafone to leave us with our long list:

Enagas, HICL Infrastructure, 3i Infrastructure, Imperial Tobacco, Eutelsat Communications, Chesnara, SSE, Red Electrica, TullettPrebon and Centrica.

As we discovered last week with 3i Infrastructure, the broker coverage for the HICL Infrastructure fund is pretty much non-existent (3i had one broker covering it) in spite of both companies being in the FTSE 250. HICL was formally the HSBC Infrastructure Company and, like 3i Infrastructure, aims to provide investors with exposure to long-term investments in public infrastructure projects with solid and predictable long-term and stable returns. Both companies are worth considering for any wider and more diversified income portfolio, but for dividend of the week we are looking for companies with a higher profile, so HICL is eliminated at this point.

Let us consider the mixed bag of companies we are left with by looking at their fundamentals, which have improved a little over the past week as the markets have endured several days of falls:

*Over three dividends

The table below represents the number of brokers in each of the recommendations categories of buy, hold and sell:

There are four utilities in the list of eight above and, for the sake of diversity, we only want to take one of them through to the shortlist. Spanish national grid operator Red Electrica and UK generator SSE (SSE) battle it out among the electricity companies and they both look very similar on fundamentals, so it really comes down to whether or not you want direct exposure to Spain and the euro. Spanish national gas grid operator Enagas and Centrica (CNA) face off among the predominantly gas-based companies, with Enagas looking better value on fundamentals than Centrica. This is backed up by the opinions of brokers, with Enagas having far more fans than Centrica.

Looking at the remaining stocks, we discussed Tullett Prebon (TLPR) in previous dividends of the week and felt that scope for dividend growth was limited and that there are still fundamental problems within the stockbroking industry. Chesnara (CSN) has long been a favourite of ours, but we feel that its shares have done too much in rising from 176p to 302p over the past 12 months and are pretty fully valued at the moment.

French satellite business Eutelsat goes ex-dividend on 18 November with the dividend payable on the 21 November. It will pay €1.08 per share for a fairly hefty 4.5 per cent return from this one dividend, although this will be subject to 25 per cent withholding tax at source. As always, check with your broker that the ex-dividend date is correct and that you will qualify for the dividend.

Imperial Tobacco (IMT) recently declared its final dividend of 81.2p and is scheduled to go ex-dividend on 15 January.

So, our final three stocks are Enagas, Eutelsat and Imperial Tobacco.

Let's have a look at the dividends paid by each company over the past six or seven years:

Enagas

The next dividend is due in December and is not yet declared.

Eutelsat

*Recently declared and going ex-dividend on 18 November.

Imperial Tobacco

*Imperial recently declared its final dividend of 81.2p going ex-dividend on 15 January. This is included in the 116.4p for 2013.

In each of the three cases above, the companies have doubled their dividends over the timeframe from 2006 to the current day, which is an impressive record considering the wider economic conditions we have suffered during that period. This should be good enough for most investors and of course it gives us a difficult call to make. Purely on fundamentals, Eutelsat looks expensive compared with both Imperial and Enagas, especially in the light of the fact that brokers are forecasting flat earnings growth this year, and that could hamper dividend growth. The prospect of picking up two dividends from Eutelsat of around 4.5 per cent in only a little over one year is tempting, but this is only the case if you reclaim all of the withholding tax charged on dividends paid by French companies, otherwise the yield falls to approximately 3.4 per cent. With flat growth forecast and the added complication of reclaiming withholding tax, we eliminate Eutelsat at this point.

In the case of Enagas, the yield on offer and the track record of payment are very good and brokers are forecasting continued growth in both earnings and dividends. In this respect, Enagas stands up well in comparison with utilities closer to home in the UK and is not faced with the souring sentiment being seen towards the sector here as political and regulatory risks continue to grow. But on fundamentals and on its recent track record it can only match Imperial Tobacco, and the decision will rest with the investor and their attitude towards the euro and, in particular, Spain.

Imperial is a long-term favourite of Investors Chronicle, primarily for its defensive qualities and consistent yield. Recent results indicated the challenges it faces, with sales volumes dipping by 2 per cent, although this was significantly better than the wider global tobacco market. And Imperial's core brands grew their market share while the company further reduced internal costs, emphasising how management is managing to combat the decline of sales in the developed world through self-help measures. Investment into electronic cigarettes could also offer a growth segment in the coming years.

Imperial Tobacco has featured in so many dividends of the week and has so often been pipped at the post, but not this week. It has a stated dividend policy of increasing its payout by at least 10 per cent and has largely missed out on the stock market rally of the past 15 months as investors have shunned defensive stocks in favour of more glamorous growth stocks. The share price stands at 2,370p, which is in the middle of its 12-month trading range. It is 57p below where it was this time last year and yet earnings and dividends have increased. Given that the market is at such elevated levels, investors should be looking at potentially recycling their gains into those stocks that have 'missed the boat' yet still have solid growth prospects and, with an eye on what could be more volatile times ahead of us, defensive qualities. For that reason, Imperial Tobacco is our dividend of the week.

*Investors considering investing in overseas stocks should be aware that most overseas countries charge a withholding tax on dividends, which can be as much as 25 per cent in France and 21 per cent in Spain. The UK has double taxation agreements with more than 100 countries, including France and Spain, which mean that investors can reclaim some of these taxes but the process can be laborious. We will be publishing a special feature on withholding tax in the coming weeks written by a leading tax accountant.