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Should you buy AMP Limited shares for the dividend in 2016?

Volatile markets, a weak economic outlook and a continuation of a low interest rate environment set the scene for many investors to continue to favour dividend income in 2016.

One blue chip stock that could meet the requirements of income investors is blue chip wealth management company AMP Limited (ASX: AMP).

By lunchtime on Monday the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) was holding up well considering the very weak lead from Wall Street last Friday with the index down just 16 points to 5,092 points.

So much for the Santa rally!

The recent rise in volatility will have some investors nervous about the outlook for 2016, particularly in light of the negative return over the past 12 months.

For investors who hold quality, maintainable dividend stocks there is arguably less to worry about as even if they experience short term declines in portfolio value, their income stream from dividend payments should remain steady.

The major problem which can arise from an income-focussed investment strategy is if your income stocks don’t turn out to have the maintainable dividends you were expecting.

As investors in blue chip Woolworths Limited (ASX: WOW) are finding out, even market-leading blue chips don’t offer assured security. According to data supplied by Morningstar, analyst consensus is forecasting a dramatic cut to the group’s dividend payout over the next few years from 139 cents per share (cps) in financial year 2015 to just 89 cps in FY 2018.

For this reason, investors must choose carefully when picking income stocks. Here are a couple of criteria worth keeping in mind.

  • Are there reasonable grounds to expect dividends to rise in the future?
  • Does the dividend payout ratio leave ample room to at least maintain the past dividend rate?

AMP’s attractive yield

Having paid out dividends totalling just 13.5 cps in 2014, analyst consensus suggests the total dividend at AMP will rise to 28.5 cps in 2015 (the group operates on a December year-end).

Importantly, the dividend is set to grow to around 31 cps in 2016 and 2017 with the dividend very well covered by forecast earnings.

With AMP’s share price currently at $5.51, the stock is trading on what appears to be a maintainable FY 2016 forecast dividend yield of 5.6%.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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