Finding cheap dividend stocks may become more challenging. Certainly, the FTSE 100 is already trading close to its record high, but the popularity of dividend shares may rise as inflation picks up. This could lead to a premium for high-quality income stocks. That’s why right now could be the perfect time to buy these two dividend shares for the long run.
Improving performance
Reporting on Wednesday was insurance specialist Direct Line (LSE: DLG). The company announced a rise in gross written premiums in the first quarter of the year, 4.2% higher than in the same period of 2016, with Motor own brands increasing 11.2%. This was an impressive performance given the high degree of competition and the high levels of consumers shopping around for the best deals.
Direct Line continues to target a 2017 combined operating ratio of 93-95% for ongoing operations. It is also on course to achieve its aim of reducing commission and expense ratios during the year. And with investment income in line with expectations at £42m, the company is on track to achieve a 2.4% yield.
With a dividend yield of 6.7%, Direct Line is one of the highest-yielding shares in the FTSE 100. Its shareholder payouts are currently covered 1.2 times by profit, which indicates they are sustainable and could grow in line with rising profitability over the medium term. Certainly, there are risks to the insurance industry from a squeeze on consumer spending and may lead to greater competition. However, with a strong brand and sound strategy, Direct Line appears to be a worthwhile income play for the long run.
Continuing recovery
Since Aviva (LSE: AV) embarked on its turnaround a few years ago, the company’s financial performance has improved dramatically. It has become more efficient, more dominant after the Friends Life merger, and it has been able to increase dividends at a brisk pace.
In fact, Aviva’s dividends per share have increased from 15p in 2013 to a forecast 25.9p in the current year. This is an increase of almost 15% per annum, with more growth on the horizon. The company plans to raise its payout ratio to around half of net profit as a dividend per year. This means that in 2018 it is forecast to yield 5.3%.
Looking ahead, a further reorganisation of its business model could lead to improving profitability. Aviva is seeking to become even more efficient and alongside the synergies realised from the Friends Life merger, this could lead to a higher dividend over the medium term.
With the stock trading on a price-to-earnings (P/E) ratio of 10.4 and being forecast to increase earnings by 8% next year, Aviva seems to be a sound income stock to buy at present. That’s especially the case since there are relatively few FTSE 100 stocks offering a 5%+ yield and a rating of less than 10.
