If you are looking for stocks to give you a second income stream, I recommend investing your money in companies that have durable competitive advantages, with high levels of dividend cover and conservative capital allocation policies. Companies like Informa (LSE: INF), which is a world leading events and business information group.
A world leader
Last year, the company acquired rival UBM, boosting sales by more than a third and doubling the group’s market capitalisation.
The deal was part of management’s plan to diversify the group, moving it away from publishing, where revenues have been coming under pressure due to the increasingly volatile advertising market, into exhibitions and events, where earnings are much more predictable.
And the shift already seems to be paying off. The company is on track to increase earnings per share by 38% this year, according to City analysts, and net profit could hit £655m, nearly double the level reported for 2017.
The dividend is also expected to increase, although analysts are only forecasting a conservative 5.6% rise. Based on these estimates, the stock supports a dividend yield of 3% and is covered 2.2 times by earnings per share, leaving plenty of room for growth in the years ahead.
Growth champion
I would also recommend Smurfit Kappa (LSE: SKG) for your portfolio if you’re trying to build a second income stream with dividend stocks.
One of the world’s leading producers of paper-based packaging products, Smurfit has more than doubled its dividend in the past six years as earnings have charged higher. Analysts believe the company will earn €686m in 2019, or €2.90 on a per-share basis, up from 2013’s figure of €1.1 per share.
As earnings have increased over the past six years, Smurfit’s management hasn’t rushed to increase the company’s dividend, which is a good sign, in my opinion. Today, the stock supports a dividend yield of 4.1%, and the payout is covered 2.8 times by earnings per share. That allows for plenty of headroom to increase the dividend in the years ahead, and providing a cushion if earnings start to decline.
On top of its attractive dividend credentials, the stock also looks cheap at current levels. It’s currently dealing at a forward P/E of just 8.6 compared to the market average of 12.6.
A strong balance sheet
The last income stock I’m going to recommend is Anglo American (LSE: AAL). The mining group has been through a rough patch over the past five years. In 2014 and 2015, earnings collapsed, and the company was forced to eliminate its dividend in 2016 to shore up the balance sheet.
Management then undertook a massive reorganisation programme and today, it’s now an entirely different beast. Net debt has fallen from nearly $12bn in 2014 to just $2.4bn at the end of 2018 and, in 2017, management reinstated the dividend at $1 per share. Profits have also returned. Last year, net income hit $3.5bn.
With net gearing down to just 10.2%, City analysts are expecting management to hike Anglo’s dividend to shareholders by 23% this year. The increase would leave the stock supporting a dividend yield of 5%. And even after this growth, with analysts predicting earnings growth of 41% for 2019, the distribution would be covered 2.4 x earnings per share, leaving plenty of room for growth in the years ahead.
