I’m a big fan of using stock market investments to generate high levels of cash income.
I admit, there’s always a risk that dividends will be cut. But if you pick stocks carefully, I think this is a risk that’s well worth taking over the long term.
Today I want to look at two shares from the blue-chip FTSE 100 index that I think deserve a place in any long-term income portfolio.
A safe 6% income
I reckon one of the safest dividend stocks in the FTSE 100 is Anglo-Asian banking giant HSBC Holdings (LSE: HSBA). This company has played a leading role in financing trade between Asia and Europe for more than 150 years. Today it has more than 39m customers.
Unlike some rivals, HSBC survived the financial crisis without needing to raise fresh cash. Although the dividend was cut, the reduction was smaller than at many other banks and the payout was never suspended.
Although critics question the group’s slow growth and fairly average profitability, I’m not concerned. I think the bank’s solid balance sheet and Asian focus mean that the stock’s 6% dividend yield is pretty safe.
I’d be happy to buy and hold these shares forever. After all, it’s worth remembering that a 6% income reinvested at the same rate for 10 years will provide an 80% gain — even if the shares stay flat.
More risk, bigger returns?
My second pick isn’t quite as safe as I believe HSBC to be. But I think advertising group WPP (LSE: WPP) looks good value at current levels and is likely to deliver a steady recovery over the next few years.
According to chief executive Mark Read, the firm’s performance during the first quarter of the year was “as anticipated“. Like-for-like revenue fell by 2.8% to £3.6bn as a result of client losses during the second half of last year. However, Mr Read says the group’s newly restructured ad agencies are making good progress winning new business.
I’m relaxed about this situation. One reason for this is that by raising £712m with a series of disposals, Mr Read has reduced WPP’s net debt from £4.9bn to £4.2bn over the last year. Despite these asset sales, revenue has been broadly unchanged.
A second factor is that WPP is still in the early stages of its three-year turnaround plan. Last year’s client losses were already known about, and the firm now seems to be making good progress reversing this trend.
Is the WPP dividend safe?
CEO Mr Read has said previously that he plans to maintain the dividend at current levels until the group returns to growth. Is this affordable?
Broker forecasts suggest that this year’s payout of 60p per share should be covered 1.6 times by earnings, which seems reasonable.
In past years, the dividend has also been covered comfortably by free cash flow. I’m not sure if this record will be maintained in 2019, but with debt falling steadily I think a cut looks very unlikely unless market conditions take a turn for the worse. The planned sale of market research group Kantar should also boost WPP’s cash position.
With the shares trading on 9 times forecast earnings and offering a 6.6% yield, I think the bad news is in the price. I’ve bought the shares myself and continue to rate them as a buy.
