For most people of working age, the full State Pension is currently about £8,500 per year. In reality, many of us will need to supplement this income in order to maintain a comfortable lifestyle when we retire.
One way to generate a second income stream is to build a portfolio of dividend stocks. Carefully selected, these should be able to provide you with a rising income over many years.
Today I’m going to look at two possible examples, starting with FTSE 100 retailer Wm Morrison Supermarkets (LSE: MRW).
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Defensive quality?
Supermarkets should be fairly defensive businesses. Our shopping habits don’t change much, even during a recession. Over long periods, supermarkets’ sales — and hopefully their dividends — should keep pace with inflation. But discounter pressures have caused problems for some, yet I believe Morrisons is one of the more attractive businesses in this sector today.
Although the Bradford-based firm isn’t the biggest supermarket, its food production business means that it’s able to produce a lot of goods in-house. In turn, this means that more of the profit from each sale stays within the firm, rather than being paid to external suppliers.
Producing its own food also means that Morrisons has been able to expand into wholesale, with a deal to supply 1,300 McColl’s convenience stores. This has opened a new channel of growth without requiring much investment.
The numbers keep improving
The firm’s recent half-year results showed that group revenue rose by 4.5% to £8.8bn during the first half of the year. Underlying pre-tax profit rose by 9% to £193m, backed by free cash flow of £242m.
Some of this cash will be used to increase this year’s interim dividend by 11.4% to 1.85p per share. Shareholders will also receive a 2p per share special interim dividend, taking the total half-year payout to 3.85p.
Analysts expect Morrisons’ earnings to rise by 7.5% to 13.1p per share in 2018/19. This puts the stock on a forecast price/earnings ratio of 20, with a prospective dividend yield of 3.1%. Although I remain bullish about this business, this share price seems fairly full to me. I’d hold for now and consider buying on the dips.
Trucking ahead
Logistics group Wincanton (LSE: WIN) has defied a number of headwinds to deliver reliable growth. Last year, for example, the firm’s underlying pre-tax profit rose by 11.8% to £46.4m. The dividend was increased by 9% to 9.9p per share, giving the stock a historic yield of 4.4%
Wincanton’s speciality is “supply chain solutions”. This means that it operates warehouses and lorries to supply stock to retailers and deliver products to customers. Among the group’s largest clients are food producers, retailers and supermarkets.
A cause for concern?
These shares have looked consistently cheap in recent years. They still do today, with a forecast P/E of 7.1 and a forward dividend yield of 4.7%.
The main reason for this low valuation is probably Wincanton’s £190m pension deficit — nearly six times last year’s profits. To try and reduce this shortfall, the group has agreed deficit reduction payments of £17.3m per year until 2021, and then £24.3m per year until 2027.
These payments mean that roughly half the firm’s profits are being used to reduce its pension deficit. I expect the P/E to stay below 10 while this situation continues, but I do think that this business could be a decent buy for patient long-term investors.
