How long do you think it would take to make a million from a 6% dividend yield? If you can invest £500 per month, it would be approximately 40 years before you hit the target.
That’s easily within an average working life, and you could do even better — the chances are you’ll get some share price appreciation too, and as you progress through your career you should be able to increase your monthly investments.
Checking my watchlist of big dividends, I see DFS Furniture (LSE: DFS) as a very nice cash cow, offering tasty dividend yields that should exceed 6% — shareholders got 5.1% last year, and analysts are expecting 5.9% this year and 6.4% next.
And this year, while lifting its interim dividend by 5.7% (and well ahead of inflation), DFS announced a special dividend of 9.5p per share. Chief executive Ian Filby spoke of the firm’s “continued good sales growth and strong cash generation reflecting the successful implementation of our proven growth strategy” and said he expects “long-term profitable growth“.
In its current public incarnation, DFS was only floated in March 2015, and just a little over a year later its shares were hammered by the EU referendum result. Since then we’ve seen a bit of a recovery, but at 275p the price is still up only 8% since the IPO, and I think that’s providing a good buying opportunity.
We’re looking at forward P/E multiples of around 11.5, and I can’t help attributing that in part to weak sentiment surrounding the UK economy and discretionary spending as we hurtle towards Brexit.
But I see it as overdone. DFS is very good at selling its goods, is strongly cash-generative, and has a policy of rewarding shareholders through dividends and share buybacks. It looks like a good time to lock in an attractive long-term yield to me.
A Woodford wonder?
Redde (LSE: REDD) is a very different kind of company, but it’s also handing out big dividends — with yields of around 6% for the past couple of years, set to rise to 6.5% by June 2018 if forecasts come good.
Dividends are only just about covered by earnings, and that might worry some investors, but it’s all down to the nature of the business. Redde is an accident management company, and almost all of its profits translate into free cash flow and are paid out as dividends — it’s a relatively low-asset business and appears to need very little in the way of capital expenditure.
Neil Woodford likes the look of Redde too, and holds it in his Equity Income Fund. In fact, at the last count, Mr Woodford’s fund held approximately 24% of Redde’s shares, with Invesco (his previous employer) holding 28.5%.
A buying opportunity
Although the share price has been flat for the past 18 months, it has soared by a massive 1,260% in five years as the company has matured into a highly profitable cash machine.
The shares are on a forward P/E of 16, dropping to 15.4 on 2018 forecasts. Compared to the FTSE 100 long-term average P/E of around 14 and dividend yields of about 3%, I don’t see that as too stretching at all.
It is a bit of a risky business to be in, but I see Redde as being close to the best in its class — and Neil Woodford’s stamp of approval makes me feel that bit more confident in it.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.