The market’s best dividend stocks are those stocks that have a rock solid business model, predictable cash flows and a history of putting shareholders first.
Unfortunately, these types of companies are few and far between. The chance to buy a perfect dividend stock at an attractive valuation only comes once in a blue moon, so when the opportunity does arrive, you have to act fast.
Legal & General (LSE: LGEN) and Standard Life (LSE: SL) are two companies that I believe have all the hallmarks of perfect dividend stocks but time is running out for investors to buy the shares at an attractive valuation.
Long-term investing
Both Legal and Standard have the hallmarks of perfect long term, buy and forget investments. As pension managers, these companies run their businesses for the long term and there’s no desire or incentive for management to boost short term profits at the expense of long term growth.
What’s more, Legal and Standard both have the advantage of size. Customers are more likely to trust large financial institutions with their money as the risk of the firm under is substantially reduced. Assets attract more assets, and these assets attract more income via the way of fees, which provides Legal and Standard with a steady, predictable stream of revenues.
With a predictable income stream virtually guaranteed, the managers of Legal and Standard have more control over their businesses than most other companies. This additional control is great news for income seekers.
Dividend champions
For the past five years, Standard and Legal have paid out more than half of their income to shareholders via dividends and this looks set to continue. The two companies have little in the way of capital spending commitments so most of the cash generated from operations can be used to bolster the balance sheet, or returned to investors.
All of these factors make Standard and Legal near perfect dividend stocks, but despite these attractive qualities, the companies are trading at discount valuations.
Indeed, at the time of writing, shares in Standard are currently trading at a forward P/E (for the year ending 31 Dec 2017) of 12.9 and yield 5%. Next year, City analysts expect the per share payout to rise 7% for 2017 and based on this forecasts the shares could yield 5.8% this year.
As one of the largest financial institutions in the UK, Legal should command a premium valuation. However, shares in the company are currently trading at a forward earnings multiple of 11.3, below the market average. At the same time, City analysts expect the company to pay 15.2p per share to investors via dividends for 2017, a yield of around 6.2% a current prices.
The bottom line
So overall, both Legal and Standard have all the hallmarks of top dividend stocks, and right now, the two income champions support dividend yields of more than 160% above the market average.
