Last week, Neil Woodford released the full list of holdings in his new Income Focus Fund. It's a diversified list of 50 stocks, with the aim of the fund being to provide investors with a regular and sustainable income. Today I'm looking at two companies from the Income Focus Fund that I rate quite highly.
From a dividend investing point of view, Saga(LSE: SAGA) ticks many boxes. For a start, Saga offers a generous yield, with the company's trailing yield of 4.2% being considerably higher than the FTSE 350's trailing yield of 2.7%.
However it's not just the company's yield that looks attractive, it's also the growth of the yield that stands out. Indeed, Saga has increased its dividend by 76% and 18% over the last two years, and City analysts expect the dividend growth to continue, with rises of 10% and 13% pencilled-in for the next two years.
The dividend looks sustainable, as with a dividend coverage ratio of 1.66, the payout appears to be comfortably covered by earnings, suggesting that there's little chance of the dividend being cut. Furthermore, Saga's interest coverage ratio of 11.2 indicates that it's unlikely that interest payments will hinder the company's ability to pay the dividend.
While FY2017 revenue was a little disappointing, falling 10% on the previous year, earnings did increase 6% to 14.1p per share. CEO Lance Batchelor sounded upbeat about the future, saying "our confidence in continuing to deliver a consistent financial performance in 2017 is strong."
On a forward looking P/E of 13.8, Saga doesn't look expensive and with demand for its products likely to remain high due to the UK's ageing population, it's not surprising that Woodford has added the company to his portfolio.
Also making an appearance in the Income Focus Fund is tile specialist Topps Tiles (LSE: TPT). This appears to be a contrarian pick by Woodford, with Topps shares having fallen from around 160p a little under two years ago, to 102p today.
At that price, the UK's largest tile retailer could offer value, with several metrics suggesting the stock is inexpensive. Indeed, Topps currently trades on a forward P/E of just 11.8, a price-to-sales ratio of 0.9 and an enterprise value (EV)-to-sales ratio of 1.1.
More importantly for income hunters, after the significant decline in the share price, Topps' yield has been pushed up to 3.4%, as the company paid out 3.5p in dividends last year. And the dividend is forecast to rise, with analysts forecasting growth of 8% and 14% over the next two years, on the back of a 17% rise last year. Dividend coverage looks strong, with last year's adjusted earnings per share of 8.9p, providing coverage of 2.5 times.
With uncertainty surrounding the UK economy and property market still lingering, it's understandable that sentiment towards Topps isn't high right now. However Woodford clearly sees appeal in the company, and for investors willing to take a long-term investment horizon, I believe Topps has the potential to reward investors with both capital and dividend growth.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.