Neil Woodford’s success as a fund manager has made him one of the most talked about UK investors of his generation. As a result, many investors buy his income fund. However, at the present time it yields around 3.3%. This is lower than the FTSE 100’s yield of around 3.7%. It is even lower than the yields of the following two companies – both of which could deliver superior income returns to the fund over the long run.
Over-50s service provider Saga (LSE: SAGA) currently yields 3.7%. While that’s only 30 basis points higher than the amount offered by Neil Woodford’s income fund, the company’s dividend growth prospects are significant. Saga is expected to report a rise in shareholder payouts of over 50% next year, which puts its shares on a forward yield of 5.6%. This makes them one of the highest-yielding shares in the FTSE 350 at the present time.
Despite such a rapid dividend growth outlook, Saga’s shareholder payouts are set to remain highly affordable. Its bottom line is forecast to rise by 5% this year and by a further 6% next year. And since dividends are due to be covered 1.3 times by profit next year, there is scope for them to rise at a similar pace to profitability in the long run. This is likely to mean that the company offers a real-terms rise in dividends in future years.
Since Saga is a relatively stable and well-diversified business, it appears to have a business model which offers robust and resilient dividends. Therefore, it could prove to be a popular income stock for the long run at a time when the UK’s economic outlook is highly uncertain.
Road to recovery
The last few years have been somewhat mixed for investment management company Man Group (LSE: EMG). Its profit has swung wildly and despite a couple of strong years of double-digit growth in 2013 and 2014, its earnings were lower in 2016 on a per share basis than they were in 2012.
Clearly, Man Group is not a stable income stock. The nature of its business means that its financial performance can change quickly. However, for less risk-averse investors it could prove to be a sound income play. A key reason for this is its dividend yield, which stands at 5%.
Looking ahead, Man Group is expected to record a rise in its bottom line of 40% in the current year, followed by further growth of 32% next year. This should allow it to raise dividends at an annualised rate of around 10% during the same period. As a result, it could be yielding nearly 6% in 2018.
Of course, the company’s earnings growth outlook can quickly change. This means a wide margin of safety is required for potential investors. Since Man Group has a PEG ratio of 0.3, it appears to offer upside potential. Therefore, for investors who are able to cope with a potentially high degree of volatility, now could be the right time to buy Man Group.