As you head towards retirement, would you like to be able to relax a little more, safe in the knowledge your stock portfolio will provide a reliable income? I know I would.
The majority of my personal investments are in dividend-paying stocks, even though I’m nowhere near retirement yet. The reason for this is that I want to benefit from the amazing power of dividend reinvestment.
This is the stock market equivalent of compound interest on cash savings — earning interest on your interest. It’s a powerful force. A 6% dividend yield reinvested for five years will increase the value of your investment by 34%, even if the share price is unchanged.
Today I want to look at two FTSE 100 dividend stocks from my watch list. Could these shares help provide you with an income for life?
Buy now while it’s cheap My first pick is advertising group WPP (LSE: LON:WPP). The WPP share price has fallen by more than 50% over the last two years, as it’s been hit by slowing growth and a fall in profits.
New chief executive Mark Read has launched a turnaround plan aimed at simplifying the group’s structure and improving its focus on creativity and technology. Mr Read believes that he’ll need two or three years to return the group to growth. Analysts expect a further slight fall in profits this year, but they don’t expect this to affect the group’s ability to maintain its dividend.
The numbers look fairly safe to me. Earnings are expected to fall 3% to 104p during 2019, covering the 60p dividend 1.75 times. These forecasts give the stock a price/earnings ratio of 8.4 and a 6.8% dividend yield.
This valuation suggests to me that a lot of bad news is already priced into the shares. Unless something unforeseen happens to cut profits, I think the dividend should be safe at this level until WPP’s profits start to rise again.
In my view, this is a great opportunity to lock in a high dividend yield and enjoy longer-term gains when market confidence in WPP improves. I rate the shares as a buy.
A super-reliable dividend WPP has not cut its dividend since at least 2003, the earliest I could find records. Not many FTSE 100 companies have such a proud record, but one firm that’s done even better is industrial technology firm Smiths Group (LON:SMIN) (LSE: SMIN).
I was able to find dividend records stretching back to 1993 which show that this 160-year old firm has not cut its dividend for at least 25 years. That’s an outstanding record.
Can investors expect this reliable income growth to continue? The firm’s financial performance suggests to me that the dividend is very safe indeed. Last year’s dividend was covered comfortably by the group’s earnings and by its free cash flow.
Spare cash Free cash flow is the amount of cash left over from the group’s revenue after costs, tax and interest costs. It’s an important measure for dividend investors because it shows whether a company’s payout can be funded from genuine spare cash.
Smith’s dividend has been covered by free cash flow for at least the last five years that I checked. Although the stock’s 3.2% dividend yield is below the FTSE average, I think it scores highly as a stock that could provide a reliable, growing income for decades to come.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019