Are you looking to generate a healthy and growing income from solid UK stocks? If so, it might be time to think out of the box.
Big and boxy
I’m looking at two top dividend stocks today, one of which you will know about. FTSE 100-listed oil giant BP (LSE: BP) is a household name but it’s still worth reminding people that it currently yields an income of 5.9% a year, four or five times the return you will get on a best-buy savings account.
The other is less well known. FTSE 250 real estate investment trust Tritax Big Box (LSE: BBOX) this morning reported an 8% rise in its adjusted earnings per share (EPS) to 6.88p in its full-year 2018 results, while operating profits jumped 21.3%.
Give me land
Tritax invests in big box distribution centres, and its tenants include impressive names such as Amazon, Argos and B&Q. Its portfolio is valued at £3.42bn and covers 54 assets and 114 acres of strategic land, including forward commitments.
Today, it reported a 7.4% increase in EPRA net asset value to 152.83p, with a total return of 12.1%, above its medium-term target of more than 9% a year. Its portfolio’s contracted annual rent roll increased 27.9% to £161.12m.
Chairman Sir Richard Jewson said while “lack of clarity over Brexit presents a substantial uncertainty for the UK economy, our market has remained robust” as occupiers continue to search for space, rents rise, and yields harden. This has reinforced the favourable dynamics for landlords, even if Brexit presents a significant risk for the UK economy.
He said the £2.45bn group’s portfolio of customers should secure the flow of dividends, “resulting in attractive returns in a low interest rate environment.” 2018 dividends totalled 6.70p per share, up 4.7% year-on-year. Tritax currently yields a forecast 4.8%. Earnings forecasts look steady at 3% this year and 5% in 2020. However, it’s not screamingly cheap, currently trading at just over 20 times earnings.
BP may excite you more. My big worry is that its share price bobs up and down in line with the oil price, and there’s not much you can do about that. You could say that about pretty much every oil and commodity stock, though. The share price is up 14.5% over the past 12 months as fears of a global economic slowdown seemed to have eased for now.
You can take a view of the long-term direction of the oil price. Will electric cars destroy demand? Can renewables step up? Will climate change force industry change? These are fun to discuss, but the variables are too great to make sensible predictions. BT is already preparing, pursuing renewable technologies while its shale business is also doing well.
BP looks promising today, with underlying profits doubling to $12.7bn last year, while its return on capital employed (ROCE) rose from 5.8% to 11.2%. Dividends have been frozen for years (it still pays compensation for the Deepwater disaster and is on the hook for another $2bn this year). But strip that out and cash flows look good. The income growth will come.
Earnings forecasts look promising with 19% growth anticipated this year and 18% next, yet it trades at just 12.6 times earnings. BP still looks a top income buy to me.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Tritax Big Box REIT. 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.