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A FTSE 100 income star yielding 5% I’d sell to buy this dividend growth stock

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With its 4.8% dividend yield, robust reputation as one of the UK’s leading wealth managers, and a track record of growing its dividend payout to investors by an average of 25% per annum for the past six years, St. James’s Place (LSE: STJ) has all the hallmarks of being one of the best income stocks in the FTSE 100.

However, a better buy for a portfolio could be AFH Financial (LSE: AFHP) and today I’m going to explain why I believe St. James’s Place’s time in the sun could be coming to an end.

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Record performance

On the face of it, St. James’s looks as if it is firing on all cylinders. At the end of April, the company reported that after a strong first quarter, funds under management had reached an all-time high of £103.5bn at the end of March, up from £95.6bn at the end of 2018. Net inflows of £2.2bn and net investment gains of £5.8bn helped power the business to this record level.

Commenting on the numbers at the end of April, chief executive Andrew Croft said, “There remains both a growing market for trusted face-to-face advice in the UK and an advice gap that represents a major opportunity for us.

The growing market also presents a substantial opportunity for AFH Financial. Today the company reported that for the six months ended 30 April, funds under management increased 68% to £5.4bn, boosting revenues and statutory profit after tax by 61% and 80% respectively.

Management believes this is just the start of the group’s growth. It is targeting assets under management of £10bn within three to five years, growing revenues from £37m to £140m at the same time.

A key advantage 

These may seem like unrealistic targets for this relatively small wealth management group, but the company has one key advantage over its larger competitor that I think will help it achieve its aspirational objectives; lower fees.

Towards the end of the last year, AFH decided to scrap its annual platform fee for new clients. The company is also committed to reducing costs for clients over time as it accrues more assets and can achieve economies of scale. In comparison, St. James’s charges an eye-watering 4.5% of savers’ initial investment, which will “be used to pay for initial advice” with a further annual fee of 0.5%, that’s excluding product charges of around 1% per annum.

Some analysis suggests clients could be paying as much as 7.14% in fees every year to St James’s. These fees go some way to explaining why it was one of the most complained about wealth managers in the UK last year.

Better value for money 

If AFH continues to offer clients a cheaper alternative, then I think the stock is worth backing for the long term as it continues towards its growth objectives. What’s more, even though it might not offer the same level of income, the stock is currently dealing at a forward P/E of just 10.2, compared to26 for  St. James’s.

Based on these numbers, AFH looks to me to offer better value for both investors and clients alike.

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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.

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