Looking for a simple-but-really-rather-good way of building your wealth over the long term? No problem. Open an ISA, pack it with a diversified group of dividend-paying companies, reinvest what they pay out, sit back and let the power of compounding take over.
OK, so four of those five steps are as easy as pie. The second -- picking which companies to invest in -- requires a bit of research and thought. To get you on your way, here's one company I'd have no qualms about adding to my portfolio at the current time and one I'd probably steer clear of.
Mighty good dividends
Assets under management climbed from £2.91bn to £3.82bn over 2017 with adjusted pre-tax profit soaring a superb 33% to £6.8m.
The new financial year has "commenced strongly", according to CEO David Barron, with two new funds launched and positive net inflows of £190m over the first two months (compared to the £494m achieved in 2017). Miton remains cash rich with £19.9m on the balance sheet at the end of last year.
But what about those dividends? Well, as a result of recent performance and confidence in the future, management saw fit to hike the total dividend by a huge 40% last week to 1.4p per share. This equates to a yield of 3.2% based on the current share price.
Tempted? You'll need to be quick. The ex-dividend date is 29 March -- three days from now.
With a forecast yield of around 4% for the new financial year and shares trading at just 11 times predicted earnings, the investment case for Miton looks compelling.
If Miton is a stock I'd strongly consider buying, environmental infrastructure firm Pennon Group(LSE: PNN) is one I'm avoiding for now. That's despite today's trading update stating that the company's performance for the year to the end of March had been in line with management expectations.
South West Water -- owned by the £2.5bn cap -- continued to do well over the last year and the company believes it is"well-positioned to respond" to new price limits from regulator Ofwat. Elsewhere, the FTSE 250 constituent's Energy Recovery Facilities (ERFs) have been performing "above base case expectations" and demand for these is expected to exceed capacity "into the long term".
On the downside, Pennon revealed that the construction of its ERF in Glasgow is likely to cost £95m more than the £155m originally targeted due to the termination of its contract with Interserve. As a result of changes to China's import regulations, it also expects a drop in H2 earnings from its recycling operations (although not enough to significantly impact on performance).
Trading at just 12 times predicted earnings following a near 40% drop in its share price since last May, Pennon's valuation is undeniably attractive, as is the tasty 6.6% yield on offer. That said, the extent to which payouts are likely to be covered by profits continues to look rather low. While I'm sensitive to the argument that the resilient nature of its business negates such a concern, I'm content to sit on the sidelines until the company's level of capital expenditure drops (due next year) and free cash flow starts to look healthier.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.