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A FTSE 100 dividend stock I’d buy and hold for the long run

With the FTSE 100 yielding 3.8% at the present time, it appears to offer strong income return potential. After all, it’s above inflation and could remain so over the medium term.

However, within the index there are stocks that could generate even higher returns in future years. One such company is prime housebuilder Berkeley Group (LSE: BKG). Its capital return plan could mean it delivers a high yield for investors, while its low valuation could allow it to generate impressive returns, too.

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Dividend potential

Between now and September 2021, Berkeley Group is expected to return capital totalling over £7 per share. This is set to be made up of a mix of dividends and share buybacks, with the company therefore having a potential dividend yield of up to 4.8% at today’s share price. Clearly, this depends on the proportion of the capital return, but the overall picture remains a positive one for its investors.

In fact, returning £2 per share to investors should not be a particularly challenging exercise for the business. In the current financial year, the company is expected to generate earnings per share of £3.51, which means that its £2 per share capital return is set to be covered 1.75 times by profit. This suggests that an even higher amount could be returned to investors in future years.

Capital growth prospects

The share buyback programme seems to be a sound method of returning capital to investors, since Berkeley Group’s shares appear to be cheap. They trade on a price-to-earnings (P/E) ratio of around 12, which suggests that they offer a wide margin of safety.

Certainly, there are risks ahead for the UK housing market. Brexit could cause investor sentiment to come under pressure. However, investors appear to have priced in this risk, while the undersupply of new homes at even the prime price point could mean that there is scope for high earnings growth over the medium term.

Income potential

Of course, Berkeley Group is not the only income stock which may be worth buying. Reporting on Tuesday was wealth management specialist Charles Stanley (LSE: CAY). Its third quarter saw further progress made, with total funds under management rising by 2.5% to £24.9bn. Total revenues in the first nine months of the year were up 7.4% versus the prior year, with like-for-like revenues from continuing activities up 9.1%.

With a dividend yield of 2.3%, many investors may feel that the stock lacks income appeal. However, with its bottom line expected to rise by 45% this year, 52% next year, and then by a further 40% in the following year, dividends are expected to rise by 89% over the next two years. This puts the stock on a forward dividend yield of 4.4%, from a dividend which is due to be covered 2.2 times by profit. As such, it could quickly become a strong income play for the long term.

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Peter Stephens owns shares of Berkeley Group. 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.