With the stock market having lost a significant portion of its value in recent months, there are a number of bargains on offer. That is particularly the case for dividend yields, which are relatively high and have the potential to provide investors with excellent income returns in the coming years. Certainly, interest rate rises are on the horizon, but anything more than a pedestrian rise in rates seems very unlikely. As such, dividend stocks look set to continue to hold great appeal.
Two house builders that tick the ‘income’ box are Berkeley (LSE: BKG) and Redrow (LSE: RDW), although they do so for very different reasons. In the case of Berkeley Group, it currently yields a very enticing 4.4% and, as its trading update today showed, it remains on-track to deliver around £2bn in profit over the next three financial years. This should allow it to meet its commitment to pay out 433p per share in dividends during the period, which equates to a yield of over 4% per annum. And, with Berkeley trading on a forward price to earnings (P/E) ratio of just 9.1, it appears to offer excellent value for money, too.
Similarly, Redrow is also performing well. Its full-year results, released today, showed record revenue of £1.15bn, which is 33% up on last year, as well as record pretax profit of £204m, which is 53% higher than last year. Despite this, Redrow pays out just 18% of profit as a dividend and this means that its shares currently yield only 1.8%. That may seem too low for purchase by income-seeking investors but, with Redrow’s earnings set to rise by a further 10% this year, rapid dividend growth appears to be very likely over the medium term. As such, now seems to be a great time to buy before other income investors pile in.
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Meanwhile, the recent falls in the stock market have also made dividend stalwarts such as HSBC (LSE: HSBA), water services company Pennon (LSE: PNN), and insurer Admiral (LSE: ADM) even more appealing as income plays.
In the case of HSBC, it now yields a whopping 6.5% and, best of all, dividends are due to rise by 2.8% next year and this means that HSBC could deliver an income return of 13.1% in the next two years. And, with dividends being covered 1.6 times by profit, there appears to be little chance of a dividend cut – especially while profit growth is being pencilled in over the next two years.
Similarly, Pennon now yields 4.4% and, unlike most of its utility peers, it is due to post excellent profit growth in the short to medium term. In fact, Pennon’s earnings are set to rise by as much as 10% next year, which puts the company on a price to earnings growth (PEG) ratio of only 1.8. This indicates that its shares could rise significantly in future, thereby making it a very appealing income, value and growth play.
Equally, Admiral remains an obvious choice for divided-seeking investors. It currently yields 6% and, with it having increased its earnings at an annualised rate of 11.7% during the last five years, has an excellent track record of profit growth. This should serve it well over the long run and, while Admiral is set to deliver a fall in its bottom line of 5% in the current year, it is due to bounce back with positive growth next year. And, with a beta of 0.88, it remains a relatively stable means through which to produce an excellent income return, too.
