If you’re looking for a reliable, market-beating income, which stocks should you buy for 2020?
In this article I want to take a look at three FTSE 100 firms whose recent performance makes me think they could be among the best dividend stocks in the UK market.
For me, a good dividend stock is one that has a track record of growth, is covered by earnings, and provides a yield that’s above the FTSE 100 average of 4.3%.
Here are three companies I think tick all the right boxes.
A 6% yield I’d buy
Legal & General Group (LSE: LGEN) has a big presence in the pension and insurance sectors. During the first half of 2019, the group reported annuity sales of £7bn and a 15% increase in assets under management, which rose to £1,135bn.
L&G’s scale is definitely a key attraction for me. But I also think this company enjoys very strong management. Chief executive Nigel Wilson has adapted his strategy to changing pension markets and made the company very profitable.
For shareholders, a key attraction is the group’s strong cash generation. The dividend has risen from 9.3p in 2013 to a forecast payout of 17.5p per share for 2019. Despite this growth, the payout is still covered 1.8 times by earnings.
Analysts expect the dividend to rise by 6.5% to 18.7p per share in 2020. This gives LGEN shares a forecast dividend yield of 6.3% for 2020.
I believe Legal & General is one of the best dividend stocks in the FTSE 100.
Big holes, big payouts
Mining giant Rio Tinto (LSE: RIO) isn’t a household name, at least not in the UK. But the firm’s Australian iron ore mines are among the biggest and most profitable in the world.
Low costs and strong demand have kept profits high in recent years. But chief executive J-S Jacques has kept spending under tight control. He’s used much of the spare cash generated by the group’s mines to cut debt and pay generous dividends.
The outlook for 2020 is actually a little more subdued than for 2019. Analysts expect profits to fall this year, with a corresponding reduction in the size of the dividend. However, it’s still early in the year. The outlook may yet improve.
As things are today, Rio Tinto offers a forecast yield of 6% for 2020. Although an industrial slowdown in China could hit profits, I think investing in Rio could be a great way to diversify your portfolio.
The best in its class?
Motor insurer Admiral Group (LSE: ADM) is a well-known name. But what you may not realise is that this company is far more profitable than most of its rivals. The main reason for this is Admiral’s approach to risk.
Essentially, the firm pays other insurance companies to take some of the claims risk in return for a fixed fee. Because of the way insurers are regulated, this means that Admiral doesn’t need to hold as much cash in reserve for possible claims.
The end result is that the company is extremely profitable and generates a lot of surplus cash. Most of this is returned to shareholders through a combination of ordinary and special dividends.
Admiral shares aren’t the cheapest in this sector. But they offer a forecast dividend yield of 5.4% and benefit from one of the best track records in the market. I’d keep buying.