If you’re looking for steady income for your portfolio, you can’t go wrong with British American Tobacco (LSE: BATS).
The tobacco producer is highly profitable and returns most of its income to investors. For the past decade, British American has reported an average operating margin of more than 30% and almost all of this income has been returned to investors or reinvested in the business to help spark up earnings growth.
Double-digit growth
Following the acquisition of Reynolds American in the US, for the years ahead, City analysts are expecting British American’s earnings to really take off.
Earnings growth of 13% is predicted for 2017 followed by an increase of 10% for 2018, which is highly impressive considering the size of the group (£113bn market cap.). As well as this growth, the shares are set to support a market-beating dividend yield of 4% for 2018 with the payout covered 1.5 times by earnings per share, so there’s room for flexibility if earnings growth starts to stumble.
That said, British American has grown its payout by around 10% per annum for the past few years, and there’s no reason why this can’t continue as earnings continue to expand.
The one downside about the shares is the valuation. Shares in British American currently trade at a forward P/E of more than 17, which is a bit expensive for my liking, although this valuation is justifiable considering the company’s growth and defensiveness.
Falling out of favour
Another top income stock you should consider for your portfolio is IG Group (LSE: IGG). Recently, shares in IG have been under pressure following a move by regulators to crack down on CFD and binary options products.
Even though it’s not possible to tell what impact these actions will have on it as yet, I believe that the firm is extremely well placed to weather any changes. Indeed, as the most significant player in the sector, the group is already well diversified away from binary options with a recent trading update noting that less than 5% of revenues is now coming from these products.
All in all, management estimates that if the regulations are implemented in their current form, revenue will decline by 10% and is planning to offset this decline by ramping up marketing spend to entice new customers to other services, such as share dealing.
Put simply, even if regulators place strict new rules on the company and its peers, it should only be a minor hindrance to the group. With this being the case, I believe that IG’s 4.8% dividend yield is here to stay, and would make a great addition to your portfolio. The payout is covered 1.4 times by earnings per share, and at the end of fiscal 2017 (31 May) IG had a cash balance of £323m so not only is the dividend well covered, but there’s also cash to back up the payout if earnings fall.
