I wouldn’t ever suggest running a stock portfolio with just three shares. But if I did, I think the three companies I’m looking at today would give you a good chance of a reliable dividend income and long-term gains. They could be ideal choices for a Self-Invested Personal Pension (SIPP).
All three firms operate in business sectors that are part of the fabric of life in most developed economies. And all three are among the largest in their market sectors, with significant market share and financial firepower.
In other words, I think there’s a strong likelihood that all three of these companies will remain in business for longer than I’ll need my pension.
Staying healthy
First up is FTSE 100 pharma giant GlaxoSmithKline (LSE: GSK). Shares in this firm have pulled back a little recently, despite the firm upgrading its full-year profit guidance in July. In my view this has opened up a potential buying opportunity.
Glaxo’s portfolio includes valuable consumer health products and a wide range of medicines. The consumer health division may be spun off at some point to leave a more focused pharmaceutical group. But whether this happens or not, I think the outlook is good for shareholders.
Cost savings and growth in areas such as vaccines are helping to restore the group’s cash flow. And a recent press report suggests that Coca-Cola might be considering a £3bn bid for the firm’s Horlicks business, which is big in India.
In my view, the stock’s forecast price/earnings ratio of 13.5 and 5.4% yield make GlaxoSmithKline a buy for income and long-term growth.
A one-stop shop
I’ve long rated commodities group BHP Billiton (LSE: BLT) as a top buy for investors wanting a reliable income from the commodities sector.
Because the firm operates in the oil and gas sector as well as in mining, investors get exposure to a diversified mix of commodities. Good quality assets and strong management mean that the firm’s profit margins are among the highest in the sector.
Net debt has fallen rapidly since the mining downturn and the group’s balance sheet looks bullet-proof to me. Free cash flow came in at £9.6bn last year, putting the stock on a cheap-looking price/free cash flow ratio of 8.3.
Strong cash generation provides good support for the dividend, which is expected to provide a yield of 6.5% this year. I rate BHP Billiton as a buy at current levels.
A moving picture
My final choice is television group ITV (LSE: ITV).There has been a lot of talk about declining advertising revenue and the shift to online subscription services like Netflix. But ITV has countered these challenges by building up its ITV Studios business, which produces programmes for the group’s own channels and licences it to other broadcasters.
Studios revenue rose by 16% during H1 and this division now generates more than half of all sales. Despite this, falling ad revenues have caused profits to slip over the last couple of years. Analysts have pencilled in a drop to 15.5p per share this year with flat earnings in 2019.
In my view, the bad news is already in the share price. I think the market will soon start to look further ahead. And with the shares now trading on just 10 times forecast earnings with a 5% dividend yield, I think it’s time to buy ITV.