Much of the total return investors enjoy from shares can come from the dividends firms pay over time. That’s why many investors search for stocks paying large and growing dividend yields.
In the FTSE 100, I like the look of these two right now and would be inclined to add them to my dividend-driven portfolio.
Energy transmission and utility services
One of the things putting some investors off investing in energy transmission and utility services provider National Grid (LSE: NG) has been the threat that a future Labour government may attempt to nationalise the company.
Another negative has been the correction in valuations affecting firms traditionally seen as having defensive operations. I think National Grid was caught up in that unwinding of the so-called ‘bond-proxy’ trade.
But I reckon things are back to ‘normal’ with National Grid today. Reading the political tealeaves, my guess is that Labour is unlikely to win a general election any time soon, which means that nationalisation of the company looks like a remote prospect. Meanwhile, the defensive stocks appear to have finished plunging en masse.
So I reckon we can consider National Grid based on the characteristics of the underlying business again. And I see a highly regulated, capital-intensive business with loads of debt, steady cash flow and a dividend that tends to rise a little each year over time. Importantly, the enterprise is more defensive than cyclical. So, despite its imperfections, I think the stock is a good candidate for a dividend-led investment strategy.
At the recent share price close to 845p, the forward-looking price-to-earnings (P/E) ratio runs just below 14 for the trading year to March 2021 and the anticipated dividend yield is 5.9%. I think the share is attractive.
Asset and wealth management
I admit that asset and wealth management company Schroders (LSE: SDR) is potentially less defensive and more cyclical than National Grid, but a glance at the long-term share-price chart suggests the firm has grown too.
In the recent half-year report, chief executive Peter Harrison explained that the firm is pursuing a strategy of investing to drive the long-term growth of the business via “a combination of inorganic investments and organic hiring.” Meanwhile, the figure for assets under management ended the period at a new high just over £444bn.
The market is challenging, he said, but the firm’s diversified business model and global footprint positions it well to deliver “positive outcomes” over the long term. And I’m inclined to give Schroders the benefit of the doubt. The firm has a decent record of raising its dividend a little each year and the valuation looks attractive to me.
My guess is that the worldwide macro-economy is not about to plunge into another credit-crunch-style depression, so I’d think about collecting Schroder’s dividend. The recent share price close to 2,867p puts the forward-looking P/E at just above 13 for 2020 and the anticipated dividend yield is around 4%.
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Kevin Godbold has no position in any 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.
Motley Fool UK 2019