As the stock market rises and interest rates fall, hunting for reliable dividends is getting tough.
Despite this, I’ve managed to find three stocks I think have the potential to provide a reliable 6% dividend yield.
Don’t ignore this cash cow
Phoenix Group Holdings (LSE: PHNX) is a £2.1bn FTSE 250 firm that specialises in managing closed books of life insurance policies, which it buys from other insurers.
Phoenix said today that it generated £147m of cash during the first half of the year, up from £110m last year. Cash generation for the full year is expected to be £350m-£450m, and the group expects to generate £2bn between 2016 and 2020.
Much of this cash will be used for dividends. Phoenix declared an interim dividend of 26.7p per share today, and plans to pay a final dividend of 28p this year. This gives a total payout of 54.7p, which equates to a 6.6% yield at current prices.
Phoenix aims to grow by acting as a consolidator and acquiring further closed book business when it becomes available. The firm’s latest deal will see it pay £375m to AXA Wealth for a group of policies that are expected to generate £500m of cash flow during their remaining lifespan.
Although dividend growth is likely to be slow, I believe Phoenix could be a good income buy at current levels.
Faster growth and high yield?
When investing for income, you often have to choose between yield and growth. Stocks offering a high yield and fast dividend growth are unusual, but they can sometimes appear in out-of-favour sectors.
I believe that Aviva (LSE: AV) is a potential example. The firm’s turnaround has been exemplary over the last few years, but the insurance sector has fallen out of favour due to fears about low interest rates and the potential impact of Brexit.
Like Phoenix, Aviva offers good cash generation. The group generated £752m of cash during the first half of the year, up from £495m the previous year. Some of this extra cash will be used to increase the interim dividend by 10% to 7.42p.
Analysts expect Aviva to pay a full-year dividend of 22.8p this year, giving a 5.4% yield. The group’s dividend is expected to rise by another 10% in 2017, giving a prospective yield of 6%.
Aviva shares currently trade on a P/E of just 8.7. I believe this is a decent buying opportunity and recently added more Aviva shares to my own portfolio.
Net cash up 216% in 2016
We haven’t yet seen the latest results from Barratt Developments (LSE: BDEV), but the firm’s July trading statement sounded very confident.
Barratt reported a 5.3% increase in total completions and a 10% increase in average selling prices. Combined, these are expected to have increased pre-tax profits for the year to 30 June by 20% to £680m.
Analysts expect Barratt to pay a total dividend of 30.5p per share for 2016. That will cost about £306m, so is comfortably covered by the firm’s net cash balance, which was £590m at the end of June.
So far, we’ve not seen any evidence that the EU referendum has disrupted the housing market. If you remain confident, then Barratt’s forecast dividend yield of 6.1% could be worth a closer look ahead of the firm’s next results.