3 Long-term Income Plays: Legal And General Group Plc, GlaxoSmithKline Plc And SSE PLC
Share price growth can give investors a real buzz in the short-term, but it's the dividend income that brings the most satisfying long-term rewards. If you can generate 4% or 5% a year and use that to buy more shares in the same company, eventually you will be talking real money.
Up to three-quarters of your long-term returns will come from dividend income. The key phrase here is long-term. Here are three income stocks with staying power.
Legal & General Group
Over the last five years, FTSE-listed insurance giant Legal & General Group(LSE: LGEN) has doubled your money in share price growth alone. The last year has been stickier with the stock down 15%, but that won't worry long-term income seekers, as L&G currently yields 5.62%. In fact, it works in their favour, because if they re-invest their dividends they'll pick up more stock at the lower price.
Somebody who invested five years ago, when the stock traded at 116p (against 238p today), is effectively getting a yield of 11.5% on their original investment. FTSE insurers have all been hit by wider stock market uncertainty yet L&G still has plenty in its favour, as a major presence in three fast-growing areas: low-cost tracker funds, UK workplace auto-enrolment schemes and bulk annuities. Earnings per share (EPS) are forecast to rise 7% this year and 8% in 2016, when the yield is expected to hit an even juicier 6.4%.
Investment fashions change but one thing seems eternal: pharmaceutical giant GlaxoSmithKline (LON: GSK) is still the FTSE 100 poster boy for dividend income. Yet even dividend heroes can suffer their moments of misfortune, with the Chinese bribery scandal and more importantly, fears of a patent cliff, hitting investor sentiment. Glaxo has been trying to wean itself off its dependence on respiratory treatment Advair/Seretide, with sales down sharply on generic competition. Moves to diversify into vaccines and consumer health, pharmaceutical products and the HIV franchise, are finally bearing fruit.
Four years of negative EPS are expected to turn positive with a vengeance in 2016, rising 14%. Forecast dividend growth looks less spectacular, but the yield is expected to continue hovering around 5.4%, perfect for investors who like to play the long game.
Some may think I'm rash by including utility company SSE (LSE: SSE) under the heading "long-term income plays". Its dividend may yield a juicy 5.83% but there has been talk of a cut as cover gets stretched. SSE has been hit by falling energy prices and increased retail market competition, as disgruntled customers switch from the Big Six energy companies to smaller challengers.
Management has committed to raising its dividend by RPI inflation at least, a commitment it stands by even though EPS are expected to fall from 124.1p in the year to March 2015 to 111.79p this year, a drop of almost 10%. It also warned that dividend cover could range from around 1.2 times to around 1.4 times over the next three years, but the yield is still forecast to hit 6% by March 2018, suggesting fears of a cut are overplayed. It still has its believers: JP Morgan is overweight with a target price of 1,550p, only slightly above today's 1,515p. That confirms my view: forget growth, SSE is all about the income, and the income is good.
Small, fast-growing companies can deliver even faster dividend growth as their earnings multiply.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.