With GlaxoSmithKline (LSE: GSK) having announced that dividends are set to flatline over the next couple of years, a number of investors may be concerned about its income prospects. After all, a key component of income investing is buying shares in companies that can raise dividends at a faster pace than inflation.
However, just because GlaxoSmithKline’s dividend is due to remain at the current level over the medium term, it’s not a company to avoid. Quite the contrary. GlaxoSmithKline offers a high yield of 5.3% and has excellent long-term dividend growth prospects.
A key reason for this is the company’s drugs pipeline. It’s relatively well diversified and has the potential to deliver key, blockbuster drugs in the coming years. In particular, GlaxoSmithKline’s ViiV Healthcare unit has bright prospects and with major cost savings set to be delivered moving forward, GlaxoSmithKline’s bottom line is set to rapidly expand. In fact, its earnings are due to rise by 13% this year and by a further 6% next year.
Furthermore, GlaxoSmithKline remains an appealing defensive play. Its business model is less positively correlated to the wider economy than is the case for a number of its index peers. This means that while stocks in other sectors may be forced to slash dividends if the global economy undergoes a challenging period, GlaxoSmithKline may be able to raise them.
Less certainty
That concern surrounding cyclicality and the potential for lower profits has held back shares in prime property developer Berkeley (LSE: BKG). They’ve fallen by 23% since the turn of the year as investors have become wary about London property valuations in particular – especially with the taxation changes that are being put in place. As such, the outlook for Berkeley is perhaps less certain than it was a year ago, although the company is still forecast to deliver profit growth in each of the next two financial years.
With Berkeley set to pay out 866p per share (30.3% of its current share price) by September 2021 in dividends, its income appeal remains very high. And with earnings per share set to be around 400p in the next financial year alone, it seems to have a relatively large amount of headroom when making its shareholder payouts.
Future looks bright
On the topic of headroom, Legal & General (LSE: LGEN) has scope to briskly increase dividends due to it having a dividend coverage ratio of 1.4. And with Legal & General’s bottom line forecast to rise by 8% this year and by a further 7% next year, its dividend outlook is very bright. Furthermore, with the company trading on a price-to-earnings (P/E) ratio of just 11.9, there’s plenty of scope for a major upward rerating over the medium-to-long term.
Legal & General’s yield currently stands at 6%, which makes it among the highest yielding stocks in the FTSE 100. This may lead many investors to determine that it’s a better income play than GlaxoSmithKline – especially since it’s expected to raise dividends by 7.7% next year, while GlaxoSmithKline’s payout is due to flatline. However, with both Legal & General and Berkeley having more cyclical business models than GlaxoSmithKline and offering less defensive qualities, the healthcare play seems to be the best dividend buy of what’s a very appealing group of income stocks.
