With the FTSE 100 yielding 3.8% at the present time, an argument could be made that a tracker fund is a sound means of obtaining a high yield. After all, the index’s yield is above inflation, and is also higher than forecasts for inflation over the medium term. However, for income investors seeking an even higher yield as well as greater dividend growth potential than the FTSE 100, Legal & General (LSE: LGEN) continues to be one of the best opportunities within the index for the long term.
A bright future
Legal & General’s recent results showed that it is making strong progress with its strategy. Its post-tax profit increased by 43% in the first half of the year, with return on equity rising to over 26% from 20% in the same period of the prior year. The company has a strong balance sheet and is seeking to expand its US presence by replicating its UK business model. While it remains cautious about the prospects for the UK economy, its focus on six major growth drivers means that it has a diversified set of operations, which could positively catalyse its earnings growth over the long run.
The company’s strong outlook from a business perspective means that the prospects of high dividend growth are substantial. The stock currently yields 5.4%, which is 1.6% higher than the yield of the FTSE 100. In 2017, dividends per share are expected to rise by 6.3%, followed by further growth of 6% in 2018. These figures are higher than the corresponding numbers for the FTSE 100, and are also likely to be above and beyond the rate of inflation. This ensures that the company’s investors should see their income returns rise in real terms over a sustained period of time.
With Legal & General having a dividend payout ratio of 65%, it seems to be balancing reinvestment for future growth and rewarding its investors. The company’s shares trade on a price-to-earnings (P/E) ratio of 11.3 at the present time and seem to be a bargain for long-term income investors.
While Legal & General’s yield is high, utility cost management consultancy business Utilitywise (LSE: UTW) has an even higher dividend yield. Based on its current year forecasts, it is expected to deliver an income return of around 9.4%. And while its payouts are not expected to be covered by profit this year, profit growth of 28% next year means the stock is due to have a dividend coverage ratio of 1.2 in 2018.
The company reported a positive trading update on Thursday. It was able to make underlying improvements to the business, such as productivity gains, despite headwinds being endured. It appears to have a solid platform for future growth, with a portfolio of energy services and strong customer service being the potential catalysts to push its profitability higher. With a P/E ratio of 10.4, it seems to be a worthwhile income stock for the long term.
Peter Stephens owns shares of Legal & General. 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.