Today, I’m taking a look at two rock solid dividend stocks with serious upside potential.
Weak pound
First up is consumer goods giant Unilever (LSE: ULVR). The stock’s current quarterly dividend of €0.3201 per share, worth just over 28p per share today, offers investors a sector-beating yield of 3.3%.
The company’s financials, including its dividends, are reported in euros, which right now gives UK investors an additional incentive to invest in the company. That’s because the pound has been sliding on international currency markets — since the Brexit vote, it has lost 13% of its value of its value against the euro. This gives a nice boost to the sterling value of Unilever’s dividends and earnings.
However, this would also mean future dividend growth in sterling terms would depend on continued sterling weakness. The pound may remain under pressure for some time given the protracted uncertainty plaguing markets, but it’s not likely to stay that way indefinitely. This should mean UK-based investors may experience greater volatility in dividend payouts.
Nevertheless, I remain bullish on the stock, as I feel that Unilever has been unfairly sold off in recent months. Even with the FTSE 100 close to an all-time high, Unilever still trades in line with its historical valuations and sector peer averages. Shares in the company are currently valued at a forward P/E of 19.2, which compares favourably to the sector average of 20.4 and its five-year historical average of 19.
While those aren’t eye-popping numbers in terms of valuations and yields, quality and security usually comes at a price.
Long-term tailwinds
Another stock that seems to offer steady income is insurer Legal and General (LSE: LGEN). Although L&G is somewhat more cyclical than Unilever, its robust profitability and strong cash generation should give investors confidence over the sustainability of its dividends.
What’s more, the insurer benefits from a series of favourable long-term tailwinds, which should support continued growth in the years to come. These include an ageing population, globalisation of asset markets, welfare reform and industry consolidation, which are factors for growing industry revenues and profitability.
While global economic uncertainty and the current low interest rate environment continue to present challenges for the insurance sector, I’m confident in the prudent and sound management of the firm. L&G has a strong track record on value creation, allocating capital efficiently to create value and delivering on steady earnings and dividend growth.
L&G has in place a progressive dividend policy that aims to return two-thirds of its net cash generation to shareholders. With this in mind, City analysts expect the stock’s dividend yield to rise from 5.4% currently to 5.8% this year and 6.1% in 2018.
Furthermore, valuations are attractive. Its forward P/E ratio is just 11.6, well below the FTSE 100 average of 15.5. Looking forward, L&G is forecast to deliver earnings growth of 13% this year, with a further 3% pencilled-in for next year.
