These 2 hated dividend stocks are buys
Since the start of the year, the FTSE 100 has risen by around 9%. However, two stocks have declined by 33% and 13% during the year as investors have become increasingly cautious regarding their near-term outlooks. This means that they now offer significantly higher yields than at the start of the year. When allied to their low valuations and bright long-term futures, this makes them excellent buys.
A dominant life insurer
Aviva(LSE: AV) saw its share price fall 13% in 2016 but this doesn't reflect the company's long-term growth potential. Its merger with Friends Life has created a dominant player in the life insurance market, which could mean that Aviva enjoys higher sales and more stable profits in future years.
Its yield of 5.2% is therefore more secure than it was prior to the merger. Aviva has stated that Brexit is unlikely to have a major impact on its business performance, which should allow it to increase net profit and shareholder payouts in future. In fact, earnings are forecast to rise by 16% in the next financial year. This puts the stock on a forward price-to-earnings (P/E) ratio of just 9.5. And with dividends expected to grow by 13%, Aviva could be yielding as much as 5.8% in 2017.
In addition, dividend coverage of around two is expected in 2017. This shows that dividends could rise at a faster pace than profit in future years, which makes the stock a strong buy for income seekers. While its near-term performance could suffer from negative investor sentiment in the wider market, Aviva's long-term prospects are hugely appealing.
A retailer with turnaround potential
Also unpopular among investors in 2016 has been Next (LSE: NXT). The retailer's share price is down by a third year-to-date and there could be further falls ahead in the short run. Consumer confidence is now at its lowest level since the EU referendum and this could cause Next to compromise on either sales or margins in the months ahead.
However, Next is still due to record a rise in earnings of 1% this year and 2% next year. While many of its sector peers are set to see severe declines in their earnings, Next offers relatively strong defensive qualities. Much of this is due to a high degree of customer loyalty that could help it to perform better than expected in 2017.
In terms of its dividend, the retailer currently yields 3.3% from a payout covered 2.7 times by profit. This shows that there's scope for a higher dividend in future years even if the UK and European retail outlook continues to be rather downbeat. And with a P/E ratio of 11.2, Next is historically cheap and could prove to be a value play for 2017 and beyond.
Certainly, volatility may be high as the UK undergoes the changes brought on by Brexit, but the retailer has significant dividend appeal for long-term investors.
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Peter Stephens owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.