Neil Woodford has gained a reputation as one of the best investors in the UK thanks to the performance of his equity income funds. One of the reasons why Woodford has been able to outperform his peers is his focus on dividend companies, particularly those companies that already have an attractive dividend yield but also have room to grow the payout significantly in the years ahead.
One of his favourite dividend picks is Legal & General (LSE: LGEN). It’s clear why this company has attracted Woodford’s attention. Legal is an enduring saving and investment company, so the business is managed with a long-term focus and management has to make sure long-term sustainability is not jeopardised by a frivolous dividend policy.
That doesn’t mean the company is stingy with cash returns. A steady income stream from products such as pensions and annuities, coupled with revenues from the company’s insurance division, means the group company is flush with cash. Last week, Legal announced that first half operating profit rose to £988m, compared with City expectations of £821m.
Legal’s size means that it’s the primary choice for savers and investors who want to put money away for the long term. According to the company’s first half results, Legal & General Investment Management saw assets under management rise 13% to £951bn — an enormous sum that makes the firm one of the largest investors in the UK stock market.
Legal is one of the UK’s premier financial companies, and its size makes it a great durable dividend investment. The shares currently support a dividend yield of 5.8%, and City analysts have pencilled in an 80p per share hike in the payout next year, indicating a forward yield of 6.1%. The dividend is covered 1.5 times by earnings per share.
Overlooked dividend champion?
Legal is the largest holding in Woodford’s newest fund, the CF Woodford Income Focus fund. Another top 10 holding is Provident Financial (LSE: PFG).
Provident has fallen out of favour with investors over the past eight months. Year-to-date the stock has lost around a third of its value thanks to management mistakes, which have led to a mass staff exodus. Still, it would appear that Woodford continues to believe in the company and with a dividend yield of 6.9% at the time of writing, it’s difficult to ignore this income champion.
Analysts seem to believe that Provident’s problems will be short-lived. The City has pencilled in a decline in earnings per share of 14% for 2017, but a recovery is expected for 2018, with earnings growth of 24% projected. For both years, analysts expect the payout to be well covered by earnings per share. Even though dividend cover is set to fall to 1.1x for fiscal 2017, next year, cover will return to a more comfortable 1.3x. And even though there is a chance the company may be forced to cut its dividend, a reduction of 50% would still leave the shares yielding a respectable 3.5%.
With Provident’s growth set to pick up again next year, the yield of 6.9% looks attractive to me.
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Rupert Hargreaves 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.