A top quality dividend will offer a worthwhile yield and the potential for future growth.
Dividends like this aren’t always easy to find, but in this article I’ll take a look at three stocks that could fit the bill.
Will the good times keep rolling?
Investing in the UK housing market through housebuilding stocks has been a sure-fire way to make money over the last few years. Berkeley Group Holdings (LSE: BKG) has climbed nearly 20% in the last year and 200% over the last five years.
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What we don’t know is when the next housing downturn will arrive. It’s probably safe to say that opinion is divided on this subject. The particular risk for Berkeley seems to be its exposure to the high-end London flat market — many of these luxury apartment developments are built for foreign investors, rather than as homes.
However, Berkeley founder and chairman Tony Pidgley has an impressive record for calling the market right. Berkeley shares now trade 63% above their 2007 peak. The firm’s earnings have kept pace with this growth, rising by an average of 36% per year since 2010.
Berkeley has ample net cash and sufficient free cash flow to fund a 6% dividend yield. Broker forecasts for the firm have risen steadily since July last year. Berkeley could still be an income buy.
Very little risk?
Investors seem to be warming to the idea of J Sainsbury (LSE: SBRY) buying Home Retail Group, which owns Argos. Shares in the supermarket have climbed by 12% so far this year and are trading at a 52-week high.
Having looked at the details of the deal, my view is that Sainsbury will probably remain the best investment in the supermarket sector. The group’s profits haven’t fallen as far as those of its peers in recent years and profit margins have remained relatively stable.
Sainsbury’s 3.7% forecast dividend yield should be well-covered by earnings, and offers real growth potential if the integration of Argos is a success. Even if Argos proves tricky to turn around, I think the outlook for Sainsbury shareholders should be fairly safe.
This could be the time to buy
Shares in FTSE 250 defence firm Meggitt (LSE: MGGT) fell by 22% in one day in October after the firm said that 2015 profits would be below forecasts.
The outlook seems to have stabilised since then. Meggitt’s full-year results were in line with the guidance given in October. Profits are expected to hit a new high of £255m this year thanks to a number of acquisitions in 2015.
The latest forecasts suggest that earnings per share will rise by 25% to 33.1p, giving a forecast P/E of about 12. A dividend of 15.4p per share is being forecast, which provides a prospective yield of 4% at the current share price of 390p.
Further growth is expected in 2017, and my view is that the outlook could be reasonably positive for Meggitt. My only reservation is that I’ll want to see evidence in this year’s results that last year’s acquisition debt is being repaid.
Despite this, I think Meggitt could be a good income buy at current levels.
