Dividends are the bread and butter of any portfolio. The steady income from dividend stocks helps investors ride out periods of market turbulence while turbocharging returns when the market heads higher. Dividends also provide a steady, carefree income stream.
Dividends are invaluable but choosing the right dividend stocks can be tough. So here are three ideas as a starting point for further research.
Long-term incomeÂ
Standard Life (LSE: SL) is one of my favourite dividend stocks. The company manages pensions and long-term savings plans, which is a long-term business model and should generate returns for investors for decades to come.Â
The company is currently trying to grow its fee-based asset management arm, a highly cash generative business and the size of Standard Life means that the group can achieve economies of scale that just aren’t available to smaller peers. Shares in the company currently support a dividend yield of 5.6%, and the payout of 19.7p per share is covered 1.3 times by earnings per share.Â
Next year City analysts expect the company’s dividend payout to rise by 10% to 21.1p, equal to a dividend yield of 6%. The shares currently trade at a forward P/E of 13.6.
Shareholder championÂ
Lancashire Holdings (LSE: LRE) is one of Neil Woodford’s favourite dividend stocks as the company has a history of returning the majority of its earnings to investors.Â
Last year the group returned 187% of its income to shareholders. For 2014 the company returned 150% of income to shareholders and during 2013 Lancashire returned 170% of income to shareholders.Â
The group has been able to return so much capital because management has decided that it would rather pay the firm’s insurance reserves out to investors than chase low return opportunities in the insurance market. City analysts expect the group to pay a special dividend to investors of 56p per share later this year for a yield of 8.6%. The shares currently trade at a forward P/E of 13.2.
Rapid growthÂ
Air Partner (LSE: AIR) is another company where management has decided to return the majority of profits to investors.Â
During the past five years, the group has returned nearly 100% of earnings to investors via dividends as the business needs very little capital to run itself. City analysts expect the group to announce a dividend payout per share of 25p for this year, which is equal to a dividend yield of 5.5%. Next year analysts have pencilled-in a dividend payout of 25.8p per share for a yield of 5.6%.
Not only is Air Partner a dividend champion but the company’s earnings are also expected to grow rapidly over the next two years. The group is currently pursuing a diversification strategy, branching out into other areas of the aviation market with bolt-on acquisitions.Â
City analysts expect acquisitions to boost earnings per share by 24% this year and a further 13% for 2018. Based on these forecasts, shares in the group are currently trading at a forward P/E of 12.4.