It is every investor’s goal (including mine) to be able to quit the rat race and live off their investment income. Even though this might seem like fantasy at first, it is entirely possible if you seek out the right investments.
Today I’m looking at two stocks that might be able to help you achieve this goal.
When it comes to dividend income, Vodafone (LSE: VOD) is one of the UK’s most established dividend stocks. For years this company has paid out healthy distributions to investors and has frequently ranked in the top five biggest dividend payers in the UK.
Today, shares in Vodafone support a dividend yield of 7.4%, more than double the market average of 3.3%.
Unfortunately, this market-beating yield does not come without a health warning. The payout is currently uncovered by earnings per share, the most common metric used to assess dividend sustainability. However, analysts are expecting earnings will roughly cover dividends by 2020 as the group’s investments in its networks around the world begin to pay off.
Personally, I’m not worried about Vodafone’s lack of dividend cover. The group’s cash flows, more than cover the payout. Last year, for example, (fiscal year ending 31 March 2018), its ‘free cash flow’ (that is, cash flow from operations minus capital spending) was €3.8bn, just covering the total value of dividends paid to shareholders (€3.9bn). In the prior year, free cash flow was €5.3bn compared to dividend costs of €3.7bn.
Overall, these numbers lead me to conclude that Vodafone’s 7%+ dividend yield is safe for the foreseeable future. As an income investment, I believe it has never been a better time to buy the stock.
Asset light, cash-rich
Shares in British Gas owner Centrica (LSE: CNA) have fallen by more than 60% over the past five years as investors have lost confidence in management’s ability to turn the business around.
There is reason to be concerned about Centrica’s outlook. Customers are fleeing the company with nearly 1m leaving over 2017 and during the first quarter of 2018.
Still, I believe that the group’s current 7.6% dividend yield is here to stay. Why do I have this view? Well, CEO Iain Conn has promised shareholders that the dividend will remain in place as long as net debt stays below £3.3bn and adjusted operating cash flow stays within its target of a £2.1bn-£2.3bn range.
On the debt front, Centrica has already made substantial progress with net debt falling to £2.6bn at the end of 2017. Further asset sales are planned, including Centrica’s 20% share in the UK’s fleet of nuclear power stations, which should push debt down further.
Regarding cash flows, the firm has increased is cost efficiency programme by £500m to £1.3bn a year by 2020. This should offset some of the revenue declines. Analysts are expecting cost cutting to help the group achieve EPS growth of 6% for 2018. With EPS forecast to come in at 13.5p for 2018, dividend cover will be 1.1 times.
After considering all of the above, I’m willing to give Centrica’s dividend the benefit of the doubt — it certainly seems as if management is committed to the distribution for the time being.
As well as the 7.6% dividend yield, the shares also trade at a discount forward P/E of 11.5.
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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.