How you could build a second income stream with these 2 dividend stocks

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With inflation rising to relatively high levels following the EU referendum, stocks with impressive income outlooks could become more popular among investors. Put simply, they may be able to help them to overcome the devaluing effects of inflation – especially when the prospects for capital growth in the near term seem more limited after the recent stock market correction.

With that in mind, here are two shares which could provide high income returns in the long run. They may become more enticing should uncertainty increase as Brexit draws closer.

Major acquisition

Life assurance and asset manager Phoenix Group (LSE: PHNX) announced on Friday that it is set to acquire the majority of Standard Life Assurance and Vebnet for a total consideration of £2.93bn. The deal would make it the pre-eminent closed life fund consolidator in Europe and would create an enlarged group with £240bn of legacy assets and 10.4m policyholders.

The deal is set to enhance the company’s cash flow, as well as provide significant potential for cost and capital synergies. In fact, the integration of Standard Life Assurance is expected to create net synergies of £720m. And with the total consideration representing 84% of its estimated Solvency II Own Funds of £3.5bn, it seems to be an attractive price to pay.

The acquisition is also expected to deliver an increased dividend with enhanced sustainability. This could be good news for investors in Phoenix Group. The company already has a dividend yield of around 6.9% prior to today’s news, so it is likely to remain considerably above inflation. While change can bring uncertainty in the short run, the long term potential of the stock seems to be high.

Dividend growth potential

Also offering an impressive income outlook is diversified financial services company Prudential (LSE: PRU). The company may only yield 2.8% at the present time, but it has significant dividend growth potential.

Notably, the company’s exposure to the Asian economy could be a major catalyst on its future financial performance. In recent years it has become a more significant part of the company’s sales and profitability, with this trend due to continue as wealth levels in the region increase. This could lead to a rise in demand for the company’s services, with its exposure to other regions across the world providing a degree of diversification and stability when it comes to dividend payments.

With dividends being covered 2.9 times by profit, there seems to be considerable scope for them to increase by at least the same rate as profit without hurting the financial standing of the business. With Prudential’s bottom line expected to rise by 10% in the current year followed by 9% next year, dividend growth could be exceptionally high. And since the stock trades on a price-to-earnings (P/E) ratio of just 12.1, it seems to offer upward re-rating potential over the long run.

Dividend millionaire

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Peter Stephens owns shares in Prudential. 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.