British American Tobacco (LSE: BATS), Imperial Tobacco (LSE: IMT), Legal & General (LSE: LGEN), Pearson (LSE: PSON) and Greene King (LSE: GNK) might be described as goldilocks income stocks. By that I mean they have above-average yields, and good records and prospects of dividend growth.
Packets of income
Tobacco companies have been some of the most reliable income generators for many years. The addictive nature of the products, substantial barriers for any would-be new entrants to the market and significant pricing power have made tobacco companies prodigious cash machines.
British American Tobacco currently yields 4.4%. The company has grown its dividend at a compound annual growth rate (CAGR) of 7% over the past four years, with analysts forecasting a 5% CAGR for the next two years. Imperial Tobacco has a marginally higher yield of 4.6% and a rather better CAGR; 11% both historic and prospective.
While Imperial may look better value at the moment, British American is the bigger of the two companies (£65bn versus £30bn) and the more geographically diversified, and I believe both stocks merit inclusion in an income portfolio.
Onwards & upwards
As you might expect of a financial company, Legal & General wasn’t immune to the havoc created by the 2008/9 financial crisis. The life insurer and asset manager reduced its dividend in the dark days, but — unlike many financial companies — L&G’s payout quickly rose to surpass its previous pre-crisis high.
The company boasts a four-year CAGR of 24%, although this has been boosted by the board’s policy of reducing dividend cover from over 3x in 2009 to a target 1.5x, which will be achieved this year. For 2016, analysts see dividend growth moderating to a still-impressive 10%, in line with earnings growth. L&G currently offers a 5.3% yield — the highest of my five goldilocks income stocks.
Learning to love dividends
Pearson is the world’s leading education company, as well as the owner of the Financial Times and joint-owner of Penguin Random House. Pearson has just come through the most significant restructuring in its 150-year history, transforming its digital learning capabilities and exposure to the huge demand for education in developing economies.
Despite earnings suffering during the last three years, 2014’s 6% dividend rise was the company’s 23rd consecutive year of inflation-busting increases. Earnings growth is set to resume this year (company guidance suggesting a 12%-20% range), and analysts are forecasting an 8% uplift in the dividend, giving a yield of 4.5%. Pearson has been a splendid long-term investment for income seekers, and can continue to be so.
Brewing up income
Greene King is Britain’s leading pub retailer and brewer. Last week, the company reported another year of record results. And there will be a step up in revenues in the coming year, following the group’s recent acquisition of Spirit Pub Company, which adds 1,207 pubs to Greene King’s existing estate of 1,909 pubs, restaurants and hotels.
Greene King has a long track record of dividend growth, including a CAGR of 6.5% over the last four years. Analysts are forecasting a slight rise in the rate to 7% over the next two years. With a solid 3.6% yield, I believe Greene King is another goldilocks stock for an income portfolio.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.