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I think this dividend stock could beat the Standard Life share price

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Whether share prices are rising or falling, active trading is good news for IG Group Holdings (LSE: IGG). On Thursday the online trading provider spoke of its “first quarter benefitting from growth in the number of active clients, and from increased client trading activity as a result of the favourable market conditions in August.”

At £129.1m, revenue in the quarter was essentially unchanged from the £128.9m recorded in the same period last year. But compared to “the average of the quarterly periods in the prior year when the ESMA measures were in effect throughout,” the firm reported an 11% increase. That suggests profitability is likely to hold up, despite tougher regulation affecting the spread betting and CFD businesses.

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Growth ambitions

IG is targeting per-year growth of 3-5% over the medium term in its core markets, and aiming for a big revenue jump of £100m by 2022 to £160m, from what it refers to as “significant opportunities.”

While I would never encourage spread betting or making CFD bets due to the horrible risks they hold, providing them as a service is a strongly cash-generative business. And IG has accumulated easily enough cash to pay for its predicted 7.3% dividends, which would otherwise not be covered by forecast earnings.

Forward P/E multiples of around 13-14 are about average, but for a company offering dividend yields so far above average, that looks like an attractive valuation to me. Over the long term, though, we do need to see that planned revenue and earnings growth coming to fruition, and for future dividends to be covered by earnings.

Investors should probably expect a little share price volatility too, as the favourability of market trading waxes and wanes.

Another big dividend

If I wanted to buy an investment services provider, I’d be more likely to go for a more mainstream asset manager like Standard Life Aberdeen (LSE: SLA). Formed from the merger of Standard Life and Aberdeen Asset Management, the combination of a major insurer and an asset management company has not sat well with some investors and clients, and the combined firm has been suffering from some teething troubles.

Client withdrawals lay partly behind a poor share price performance in August, and we’re looking at a 35% loss over the past two years.

The fall has helped push expected dividend yields up to 8%, and at that level a P/E of 14 looks attractive. But again, the dividend is not covered by earnings. Over the short term that shouldn’t matter, as the firm has committed to maintaining an annual payment of 21.6p as it works through its rebirth process.

Plenty of cash

There’s easily enough cash on the books to do that, so shareholders relying on Standard Life Aberdeen for income should not go wanting, at least not for now. But what makes me a little uncomfortable is I see this as akin to a recovery situation — the kind where the troubled company is expected to come good, but we haven’t seen it happening yet.

Right now, Standard Life Aberdeen is acting as if its improved future is already a fact, and paying dividends accordingly. So, while I think things are likely to come good, I’m going to hold out a little longer and keep watching.

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Alan Oscroft has no position in any of the shares 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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