Buying dividend stocks has generally been a sound strategy in recent years. Low levels of inflation plus low interest rates have resulted in higher-yielding shares becoming more popular. Even though inflation is expected to rise, companies that offer growing dividends and a relatively high yield should still prove popular in 2017. Here are two stocks which offer just that combination, as well as wide margins of safety through low valuations.
A growing life insurer
Aviva‘s (LSE: AV) decision to merge with Friends Life has thus far proven to be highly successful. The expected synergies are on target to be delivered and the combined entity should provide greater resilience in future years. It should be a more dominant player within the life insurance space and, since Brexit is unlikely to have a major impact on the business, its risk profile remains relatively low.
The company’s yield of 5.4% is around 180 basis points higher than the FTSE 100’s yield. Furthermore, it is likely to rise at a faster pace than that of the wider index, since Aviva is likely to raise dividends by at least as much as earnings growth over the medium term. Since it is forecast to post a rise in earnings of 14% this year, followed by 6% next year, this should easily beat inflation. The company could even be yielding over 6% within a couple of years.
Aviva trades on a price-to-earnings (P/E) ratio of 9.6. While there is scope for the FTSE 100’s value to come under pressure since it is near to a record high, the company’s valuation indicates it offers an attractive risk/reward ratio.
A recovering healthcare play
AstraZeneca (LSE: AZN) may seem like an unlikely choice as an income stock. Certainty, at 5.2% it yields well in excess of the FTSE 100. However, it has not raised dividends in recent years, as its loss of patents has led to significant declines in earnings.
This situation is forecast to change. Although the company’s bottom line is expected to fall by 9% this year, growth is anticipated from 2018. In the 2018 financial year, AstraZeneca’s net profit is due to rise by 11% and this could be the start of a period of better performance for the business. It has a strong pipeline of potential treatments thanks to major investment in recent years. And with a growing bottom line could come a rising dividend. In fact, in 2018 its shareholder payouts are expected to rise by 2.2%.
Since AstraZeneca trades on a P/E ratio of 12.6, it appears to offer excellent value for money. Upward re-rating potential is high, especially since historically it has had a P/E ratio which is in the mid to late teens. Therefore, its shares could offer defensive appeal in 2017 during what could be a challenging period for the wider market. When combined with its bright income potential, this makes the stock a standout dividend play.
