Growth share investors look for future profits and cash tomorrow, while income investors seek dividends today. And while I’ve gone for plenty of growth shares in my time, these days I see reliable dividends as the most attractive attribute of a stock.
Top sector
The insurance business can be volatile, and its nature pretty much guarantees that. But looking to the longer term, it’s one of my favourite sectors for generating income. Today, I’m looking at Legal & General Group (LSE: LGEN), whose risk is lowered by the savings and investment management side of its business.
Legal & General shares slumped pretty badly in 2018, despite the outlook for the company still looking reasonable. Well, by reasonable, I mean the rapid earnings growth of the past few years is forecast to stop, and flatten out for the year ended December 2018 and the next two years.
Growth transition
The end of such a growth phase usually leads to a lot of investors dropping the shares, but I see that as missing the key attraction of the firm. It’s always been good at translating those earnings into strong cash flow and paying out decent dividends.
The shares have actually recovered by 17% so far in 2019, but I reckon that’s still leaving them on too low a valuation. Dividends, which are well covered by earnings, are expected to continue progressively upwards to yield 6.6% in 2019, and 7.1% in 2020.
We’re looking at very low P/E multiples too, of around 8.5, which I think is just too cheap. Results are due on 6 March.
Super reliable
Engineer Smiths Group (LSE: SMIN) is a dividend stock that I like for a slightly different reason.
Smiths’ dividend yields are a good bit below the top payers of the FTSE 100, with forecasts of only a little over 3% which is below the index return of 4.9% currently predicted for 2019. Why do I think that’s so good?
If there’s one thing I like better than a big dividend today, it’s a reliably progressive one that will keep on growing for years to come. A 3% yield now that’s likely to keep growing in line with inflation (or better) is worth more, I think, than a bigger current yield that’s less dependable.
The dividend at Smiths has been growing ahead of inflation, and that’s forecast to keep going for the next couple of years. And even an annual rise of half to one percentage point bigger of inflation is enough to grow into a very handsome income stream over decades.
Dependability
What does Smiths look like if we go back further? My colleague Roland Head has investigated exactly that and found records going back 25 years — and not once in that time has the firm cut its dividend.
That impressive record comes at a higher price than something with more short-term volatility, and Smiths shares currently trade on P/E ratios of around 14 to 15. That’s close to the FTSE 100’s long-term average, but I see Smiths Group as a distinctly better than average investment.