Two Neil Woodford dividend stocks that could make you a millionaire

Roland Head highlights two stocks with serious wealth-building potential.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Although insurance businesses aren’t always easy for investors to understand, in my experience they can be very profitable investments.

Today I want to look at two dividend stocks in the insurance sector, one of which I own myself — and both of which are owned by top fund manager Neil Woodford.

The specialist choice

Lancashire Holdings Limited (LSE: LRE) is a specialist insurer which provides insurance against assets such as aircraft, ships and oil rigs.

This year’s damaging hurricane season has brought to an end a run of quiet years without major payouts. The group’s return on equity for the third quarter has fallen to -10.4%,  from +3.1% during the same period last year.

These losses aren’t unexpected. The group’s loss estimate of $106m-$212m is described as “comfortably within our expectations” by chief executive Alex Maloney.

For shareholders, there’s good news and bad. In the short term, the bad news is that the bumper special dividends paid in recent years will be stopped. Management believes that market conditions in 2018 will allow it to put fresh capital to work, so it won’t be returning spare cash to shareholders.

This means that the dividend yields of 7-10% enjoyed by shareholders will come to an end for now, at least. Instead, shareholders will get Lancashire’s ordinary dividend, which gives a yield of about 1.5% at current prices.

The good news is that the company believes that this year’s string of major catastrophes mean that insurance rates are likely to rise. Rivals who have been under-pricing risk could run into problems and securing higher rates now should support profit and dividend growth in the future.

During the years I’ve been following this company, management commentary has always been consistent and accurate. I’m not surprised that Lancashire shares have risen by 20% since late September and investors are pricing in a more profitable future.

I suspect we may get a chance to buy the shares more cheaply when market enthusiasm calms a little. In any case, I rate this stock highly as a quality business.

I’m not selling yet

One of the oldest holdings in my own portfolio is currently Aviva (LSE: AV). This stock has been a great income investment for me and has delivered a healthy capital gain to date. But I’m not in any rush to sell just yet.

Chief executive Mark Wilson has been consistent in his focus on cash flow, profitability and balance sheet strength. The success of this approach seems clear to me. During the first half of this year, cash generation rose by 56% to £1,170m, while operating profit rose by 11% to £1,465m. The group’s Solvency II coverage ratio, a key regulatory measure, improved from 189% to 193%, putting the group on a level with key rivals.

Although Wilson has now delivered several years of consistent progress, the market has remained cautious and Aviva’s valuation still seems quite modest to me.

At around 515p, the shares trade on just 1.2 times their book value of 412p per share. The stock’s forecast P/E of 9.5 is lower than many rivals, and the forecast yield of 5.1% is above average for this sector. I’m seriously considering buying more for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 industry-leading value stocks investors should consider buying

These value stocks are at the top of their respective industries, and look like current bargains with the potential to…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Just released: our 3 top small-cap stocks to buy before August [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

If I’d put £5k in a FTSE 100 index fund 10 years ago, here’s what I’d have now!

Charlie Carman explores the performance of the FTSE 100 index over the past decade and the merits of passive versus…

Read more »

Investing Articles

£15K stashed away? I could turn that into a second income worth £49 a day!

This Fool explains how she would look to gain a second income through investing in UK stocks, and the steps…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

With the Apple share price near an all-time high, would I be crazy to buy more?

After touching all-time highs yesterday, the Apple share price is on a roll. But is there still enough growth ahead…

Read more »

Investing Articles

Nvidia stock has fallen 13% from its 52-week high! What next?

Our writer explains why Nvidia stock has dipped recently and highlights some risks associated with investing in the AI leader…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

The AstraZeneca share price is up 88% in 5 years, but is it just getting started?

The AstraZeneca share price has had a great few years, as acquisitions and clinical trials delighted shareholders. So is there…

Read more »

Investing Articles

Here’s why I’m watching the Anglo American share price

The mining sector has always interested investors. But after a flat few years, I'm wondering what's next for the Anglo…

Read more »