“If you don’t find a way to make money while you sleep, you will work until you die.” — Warren Buffet
Building a second income stream from high-quality dividend stocks is a fantastic way to create wealth over the long term. And the best part is, this strategy requires little effort on your part. Here are two companies that I believe are perfect candidates to help you accomplish this goal.
Slow and steady
Over the past six years, the group’s dividend per share has grown at an average annual rate of 8.2%. Today the shares yield 2.1%, compared to the market average of 3.7% and trade at a forward P/E of 15.
You might be wondering why I believe Fuller’s is a great income stock with a yield below the market average. The reason is that payout is covered three times by earnings per share, and the company, which is one of the largest pub and hotel groups in the UK, has a strong balance sheet and bright growth outlook.
Today’s full-year numbers from the group showcase its strengths. For the 52 weeks ended 31 March, revenue jumped 5%, “above the industry average” for managed pubs and hotels. Adjusted earnings per share increased 4%.
Off the back of these numbers, management has increased the full-year dividend by 4% to 19.6p per share.
These are tough times for the pub industry with costs rising thanks to Brexit, rising business rates, a higher minimum wage and apprenticeship levy, factors that are causing strain across the industry. However, it seems as if Fuller’s has been able to offset these issues. “During the year, we have had to absorb a number of cost pressures” today’s release noted. “Despite this, we have continued to grow profits and the impact has been mitigated to a margin dilution of 10 basis points” it continued.
Fuller’s efforts to mitigate these pressures are a testament to the group’s structure, and efforts by management to cut waste. Reinvestment in operations has been essential to staying ahead of the rest of the sector. The company spent £28.2m on refurbishment, new pub openings, automated equipment for its Chiswick Brewery and IT investment throughout the year. Capital spending was easily covered by £51m of cash generated from operations. Dividends only cost the firm £11m, so there’s plenty of headroom for further dividend hikes.
Considering all of the above, I believe Fuller’s can help you build a second income from shares despite its relatively low yield. The dividend is well funded, and the company is spending millions investing in itself to drive growth.
Secure Trust Bank (LSE: STB) is another stock I believe can help you build a second income stream. At the time of writing, this stock supports a dividend yield of 4.4%, above the market and the banking sector average of 3.5%.
In my view, over the past five years, Secure Trust has quickly established itself as a high-quality income stock. For 2018 the firm is expected to distribute 83.2p per share, up 46% from 2012’s payout of 57p giving an average annual growth rate of 6.7%.
And the sustainability of this distribution is set to increase substantially over the next two years if City expectations are to be believed. Analysts have pencilled in earnings per share growth of 38% for 2018 followed by growth of 33% for 2019. The dividend is expected to grow at a more moderate pace — 5.3% for 2018 and 7% for 2019 — the result being that dividend cover will rise from just 1.1 in 2016 to 2.2 by 2019.
With this being the case, Secure Trust’s investors are not only set to receive a market-beating dividend yield, but they should also benefit from capital growth as well. At present the stock is trading at a forward P/E of 13.2, falling to just 9.9 by 2019 based on current growth expectations.
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Rupert Hargreaves owns no share mentioned. 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.