Finding shares with a mix of high, growing dividends and a low valuation may seem difficult at times. In many cases, investors have already latched onto the positive investment case that they offer and their valuations move higher. This also means that their dividend yields are compressed, and this can create a narrower margin of safety for new investors.
However, Legal & General (LSE: LGEN) is one company which still appears to offer a compelling investment case. It could generate high total returns in 2018, but is not the only company with the potential to do so.
With a dividend yield of 5.6%, Legal & General is still one of the highest-yielding stocks in the FTSE 100. At a time when inflation is continuing to move higher, this could make it a highly attractive stock to own over the medium term. Since dividend payments are covered 1.7 times by profit, they have scope to move higher at a faster pace than profit growth without hurting the financial health of the business.
The company’s dividends are expected to increase by 6% in the 2018 financial year. This means the stock could be yielding 6% in the current year. Investor sentiment could therefore improve significantly over the coming months.
Despite its upbeat income outlook, Legal & General continues to trade on a relatively low valuation. The company’s share price may have risen by 11% during the course of the last year, but it still trades on a price-to-earnings (P/E) ratio of just 11. At a time when the FTSE 100 is trading at a record high, this suggests that the stock offers a wide margin of safety. This indicates that it is relatively unpopular at the present time, but that it could generate high returns in the long run.
Total return potential
Also offering high total return potential in the long run is wealth management specialist Rathbone Brothers (LSE: RAT). The company released a positive trading update on Thursday for the three months to the end of December. It recorded robust growth in funds under management, rising by 14.3% to £39.1bn. Total net inflows across the company for the 2017 financial year were £2.1bn, which is higher than the £1.7bn recorded in 2016.
Looking ahead, Rathbone Brothers is expected to report a rise in its bottom line of 10% in the current year. This could be boosted by the prospects for improved performance from global stock markets, with investor sentiment remaining upbeat at the present time. Despite this, the stock trades on a price-to-earnings growth (PEG) ratio of 1.9, which appears to be low relative to its sector peers.
With a dividend yield of 2.6% and dividend cover of 2.2, the company looks set to become an enticing income play in the long run. As such, now could be the right time to buy it.
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Peter Stephens owns shares in 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 us better investors.