2 bargain dividend stocks that could fund your retirement
The last eight years have been tough for retired people, with rock bottom interest rates slashing the returns on cash and annuities. There has been one saving grace, in the shape of top dividend paying stocks like these two FTSE 100 favourites. They could be a great source of retirement income and you may also get some capital growth on top.
Legal & General
Insurance giant Legal & General(LSE: LGEN) yields a generous 5.85% right now, which is more than 23 times today's base rate. Why put up with 1% on cash when you can get this kind of return? Naturally, buying individual company stocks is riskier than leaving money in the bank, but these days the rewards outweigh the dangers, providing you are investing for the long term. The yield is covered 1.5 times from earnings, and looks reasonably solid.
That said, Legal & General's growth rates have fallen lately. After five consecutive years of double-digit earnings per share (EPS) growth, they are expected to fall to -2% this year. Brexit is partly to blame, its share price fell sharply after the shock referendum result. Pension freedom reforms were another issue, hitting annuity sales, which were a large part of its business.
However, the company still put in a terrific performance in 2016, with profit before tax up 17% to £1.6bn, EPS up 19% at 22.2p and a return on equity of nearly 20%. One of the joys of investing for dividends is that you typically get a rising income stream as companies increase their payouts year after year. L&G scores on this front, with the board recommending a 7% increase in the full-year 2016 dividend.
The company's balance sheet is strong, adding £400m of regulatory capital taking its total to £5.7bn, giving the group a solvency coverage ratio of 171%. It is also building a strong position in the vast and lucrative growing group annuity market, both in the UK and US. Despite all these advantages it trades at just 11.07 times earnings, and as for that dividend income, the yield is forecast to hit 6.6% by the end of 2018. Happy retirement.
The highly competitive grocery market has been a tough place in recent years, and many investors will have shunned Sainsbury (LSE: SBRY) as a result. Few will have regretted doing so, with the share price trading 15% lower than five years ago. In fact, today's share price of 256p is roughly half its pre-financial crisis peak of 592p, showing the scale of its fall from grace.
On the plus side, this is reflected in the price with it trading at just 10.64 times earnings. The real attraction of this stock is the dividend yield, currently 4.72%, handsomely covered two times. Last month's Q4 trading statement showed solid food performance, and good growth at its recent acquisition Argos, with total like-for-like sales up 4.3%.
Coupe de Ville
Investor hopes now rest on Argos and things look promising on that front, with group chief executive Mike Coupe investing in digital to boost service and availability, and planning enhancements to the Argos website and app. The future could prove a little bumpy as UK consumers feel the pinch but the Sainsbury's income stream should hold up until we see whether Argos can save the day.
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Harvey Jones 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.