With Vodafone (LSE: VOD) yielding 5.1%, many investors will feel that the company is a top-notch income play. However, its profitability has come under severe pressure in recent years due to the poor performance of the European economy, to which Vodafone is heavily weighted. This lack of profit growth has caused dividends to rise at a relatively slow pace and looking ahead, Vodafone is due to increase shareholder payouts by just 1.7% during the next two years. This means there’s a realistic chance Vodafone’s dividend growth will fail to beat inflation.
However, the prospect of this shouldn’t worry long-term investors. That’s because Vodafone is forecast to grow its bottom line by 22% in the current year and by a further 29% next year. This should help to improve investor sentiment, but also could allow Vodafone to begin to increase dividends at a faster rate over the medium term. And with Vodafone expanding into new product lines such as broadband in the UK, it seems to be a more diverse and robust business, which is good news for income-seeking investors.
Future income star?
Also offering superb long-term income potential is diversified financial services provider Prudential (LSE: PRU). Although its shares have disappointed of late and the company comes with a degree of uncertainty owing to a change in management, Prudential has excellent growth prospects that should boost dividend payments. For example, it’s well-positioned to take advantage of the increased usage of financial products in Asia and with a relatively well-diversified business model, it offers a degree of stability and consistency many financial services companies can’t match.
With Prudential yielding 3.1%, it may lack appeal on the income front according to some investors. However, with the aforementioned growth prospects and the fact that dividends account for just 36% of profit, Prudential’s dividend payments could be on the cusp of a rapid rise. As such, and while other stocks may yield a higher income return over the next couple of years, Prudential could be a superb long-term income play.
Meanwhile, financial services holding company St. James’s Place (LSE: STJ) could also prove to be a sound income buy. It has a yield of 3.6% and has increased dividends per share from 8p to almost 32p in the last five years, an increase of four times. Clearly, this rate of growth is unlikely to be repeated in the next five years, but with St. James’s Place forecast to record a rise in net profit of 24% next year, dividend growth looks set to remain buoyant in the coming years.
While St. James’s Place trades on a price-to-earnings (P/E) ratio of 26.1, its strong growth rate means that its shares still offer good value for money. In fact, they have a price-to-earnings-growth (PEG) ratio of 1.1 and this indicates that as well as offering the potential for a high income return, St. James’s Place could be on the cusp of excellent capital gains, too.
Despite this, there's another stock that could prove to be an even better buy. In fact it's been named as A Top Income Share From The Motley Fool.
The company in question could make a real impact on your income prospects in 2016 and beyond. And in time, it could help you retire early, pay off your mortgage, or simply enjoy a more abundant lifestyle.
Click here to find out all about it – doing so is completely free and comes without any obligation.
Peter Stephens owns shares of Prudential and Vodafone. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.