Right now, the FTSE 100 is full of dividend bargains. Around a third of the index supports a dividend yield of more than 5%, and some stocks even offer double-digit yields. Today, I’m going to outline two of these stocks and explain why I believe they have the potential to double your money over the next few years.
Cash returns
My first FTSE 100 dividend champion is home builder Persimmon (LSE: PSN). While this company might not have the best reputation in the sector, the enterprise certainly looks after its investors. After a near-death experience in the financial crisis, management brought in a cash return programme, designed to reward shareholders who had stuck with the business through thick and thin.
Initially, the company outlined a plan to return £1.9bn of surplus capital to shareholders between 2012 and 2021. Following better than expected trading, management has more than doubled this target. From an initial goal of £6.20 per share in capital returns, the total value of the plan has been increased by 110% since its inception, to £13.00 per share to 2021.
According to this schedule, during the next two years, Persimmon will payout 345p to investors as dividends, giving a yield of 15% on the current share price. And I don’t think management will stop there. The company has quite easily been able to meet its cash distribution targets and has also accumulated nearly £1bn of excess funds at the same time.
With this being the case, I see no reason why the business cannot continue to return at least £2 per share to investors every year from the end of its current plan in 2021. On that basis, I estimate it would take investors around seven years to double their money with the Persimmon share price, assuming all dividends were reinvested along the way.
Income champion
As well as Persimmon, I also believe its peer Taylor Wimpey (LSE: TW) has the potential to double your money over the next six-to-seven years.
Like Persimmon, Taylor is a cash machine. Its homebuilding operations have generated a tremendous amount of capital over the past five years. The majority of this excess cash has been returned to investors. I think this trend is likely to continue, as the company balances cash returns with investment in its operations.
At the end of its last financial year, Taylor reported a net cash balance of £617m, more than enough to fund a special dividend equivalent to 10% of the share price.
City analysts expect this trend to continue. They’ve pencilled in a dividend yield of 10.7% for 2019 and 10.8% for 2020. Once again, assuming there are no significant changes in the property market, I see no reason why this trend cannot continue into the mid-2020s.
At this rate of return, assuming all dividends were reinvested, Taylor’s shareholders would be able to double their money in seven years. What’s more, at the time of writing, the stock is trading at a forward P/E of just 8.3.
