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These FTSE 100 income stocks could be retirement cash cows

High-quality income stocks have the potential to generate a solid income stream in retirement. The key, to avoid losing purchasing power to inflation over time, is to invest in companies that consistently increase their dividend payouts. With that in mind, here’s a look at two stocks that not only pay chunky dividends now, but that should should grow their dividends at a healthy rate going forward.

Imperial Brands

For those seeking a sizeable yield that has the potential to grow at a decent pace, it’s hard to look past Imperial Brands (LSE: IMB) right now. The stock is currently trading around 11% below it’s all-time highs set last year, and as a result, Imperial’s dividend yield has been pushed up to a healthy 4.2%. That level of yield looks attractive to me, relative to rival British American Tobacco’s 3.2% and the FTSE 100’s median trailing yield of 2.7%.

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Imperial has an excellent dividend growth record, having increased its dividend by a stunning 10% for the last eight consecutive years. And the company stated last November that it remains committed to this level of increase over the medium term, meaning that the forecast yields for the next two years rise to 4.6% and 5%.

The tobacco giant released its half-year report last week, and while the numbers weren’t amazing, with tobacco net revenue and total adjusted operating profit falling 5.5% and 7.6% respectively (on a constant currency basis), the company stuck to its dividend pledge, raising the interim dividend by 10% to 51.7p per share. Management also stated that the company remains “on track to meet ful- year earnings expectations at constant currency.

With the share price having underperformed the FTSE 100 significantly in the last six months, clearly some investors have doubts about the long-term profitability of the company. However Imperial is reinvesting £300m this year into “selected quality growth opportunities” and believes that it can generate earnings growth of 4%-8% annually in the years ahead. On a P/E of just 13.7 vs 18.5 for British American Tobacco, I reckon Imperial offers great value for income hunters at present.

Aviva

Another FTSE 100 giant offering an attractive yield at present is Aviva (LSE: AV). The insurer paid out dividends of 23.3p last year, equating to a trailing yield of 4.3% at the current share price, and analysts have pencilled-in payouts of 26.2p and 28.2p for the next two years, yields of 4.9% and 5.2%.

Furthermore, analysts at Credit Suisse believe there could be the possibility of a special dividend in the near future, stating recently that the improving capital flexibility of the business means management could surprise shareholders with a special dividend of 16p as early as this year.

While FY2016 dividend coverage at Aviva was no doubt low at an unsustainable level of just 0.65, earnings are forecast to rise significantly this year, resulting in an estimated dividend coverage ratio of a considerably more healthy 2.1 for FY2017. As such, with profitability set to rise, and the company planning to increase its dividend payout in coming years, Aviva has the potential to be a cash cow for long-term investors in my opinion. 

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Edward Sheldon owns shares in Imperial Brands and Aviva. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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