There are plenty of blue-chip stocks in the UK that yield more than 5% right now. Today, I’m going to cover three of my favourites. If you are looking for income, I highly recommend taking a closer look at these FTSE 100 dividend stocks.
Revving higher
There’s a reason why Warren Buffett has invested most of his money in insurance companies, and that’s because they tend to be highly profitable. Direct Line (LSE: DLG) is no exception.
One of the UK’s leading insurance businesses, Direct Line sells its insurance policies direct to customers so, unlike many of its peers, the group doesn’t have to pay hefty commission fees to brokers. This clearly shows in the company’s profit margins. Last year, the firm reported an operating profit margin of 16.9%, compared to the UK insurance industry average of 8.5%.
City analysts believe the company will distribute 28.5p per share in dividends this year, giving a potential dividend yield of 8.4%. Last year it paid out 21p and in 2017 it distributed 20.4p.
In other words, Direct Line has a history of distributing lots of capital to shareholders. Unless the company’s business suffers a sudden shock, I don’t see any reason why this trend will not continue. At the time of writing, the shares are dealing at a forward P/E of just 11.4.
Under the radar
My second blue-chip income play is Phoenix Group (LSE: PHNX). Phoenix isn’t a household name, and it isn’t likely to become one anytime soon. The company specialises in the acquisition and management of closed life insurance and pension funds, which is hardly the most exciting sector.
The business of managing pension assets might be boring, but it’s essential and Phoenix has carved out a niche for itself in the industry. After buying Standard Life Aberdeen’s insurance business last year, profits at the group jumped nearly 100% in 2018 to £708m, and assets under administration hit £226bn.
Off the back of this growth, management decided to increase the company’s dividend to 46p, giving the shares a yield of 6.3% at current prices. City analysts are expecting more of the same for the next two years with the payout set to increase marginally to 46.8p by 2020.
The shares do look expensive, trading at a forward P/E of 18. But the stock is also trading at a discount to book value of 10% so, from this perspective, Phoenix looks undervalued at current levels.
Turnaround complete
Sticking with the insurance theme, RSA Insurance (LSE: RSA) is my third and final blue-chip income play I’m going to profile.
After cutting its dividend by 70% in 2013, and then 80% in 2014 as losses mounted, the team at RSA has been working flat out to turn the business around. Led by former RBS boss Stephen Hester, the company is now back on firm ground. Profits have recovered and the dividend is growing rapidly.
This year, the City expects the company to report a net profit of £488m and earnings per share of 45.5p. Analysts believe this will give the business capacity to distribute 28.7p per share to investors, giving a dividend yield of 5.4% at the time of writing. They’ve also pencilled in dividend growth of 13% for 2020, offering a potential dividend yield of 6.1% for next year.
Shares in RSA are currently changing hands at a forward P/E of 10.9.
