If you’ve got a lump sum to invest in the stock market, how should you start?
I believe it makes sense to focus on good quality dividend stocks. While you’re still saving for retirement, dividends can be reinvested to boost your returns. And when you need a second income, dividends let you withdraw cash from your portfolio without having to sell any shares.
Here are three FTSE 100 dividend stocks I’d like to buy today.
A reliable performer
The Vodafone Group (LSE: VOD) share price has risen by more than 25% from this summer’s lows. I think that this could be the right time to invest in this £43bn firm, which has two powerful attractions for investors.
Firstly, VOD owns Europe’s largest 4G and 5G networks, plus some of the biggest broadband networks in Europe. It also has a big footprint in Africa, which I think is likely to be a great long-term growth market.
The second big attraction is that Vodafone generates a lot of cash. The company’s earnings are complicated by all sorts of non-cash adjusting factors. I think it’s easier to ignore this and focus on free cash flow, which is currently running at more than €5bn per year.
This provides cover for the dividend and leaves the VOD share price looking decent value on about nine times free cash flow.
Plans are under way to beef up the firm’s finances and cut costs. The shares offer a forecast yield of 5%. I reckon this is a stock you could safely buy and forget for a decade.
Age and beauty
I find that a good way to unearth reliable performers is to look for companies that have been doing the same thing successfully for a very long time. My next pick, luxury brand Burberry (LSE: BRBY), has been turning out desirable clothing since 1856 — 163 years.
Burberry has now earned a place towards the top of the luxury fashion market. It’s also benefited from the growth of the Chinese market over the last decade — sales in China grew by a “mid-teens” percentage during the first half of the year, compared to “high single-digits” in the UK.
Global sales rose by 5% to £1,281m during the six months to 28 September. Profit margins are improving after a difficult few years and I expect this trend to continue.
Burberry stock currently trades on about 24 times forecast earnings, with a dividend yield of just 2.1%. But the firm has high profit margins, a very strong brand and generates lot of spare cash. I think this is one fashion buy you’re unlikely to regret.
Top up with this 6% yield
My final pick is insurance and asset management firm Legal & General Group (LSE: LGEN). It’s big and complex. But it also generates high returns and plenty of surplus cash for shareholder dividends.
During the first half of 2019, the group’s operating profit rose by 11% to £1,005m. Cash released from the group’s operations — which gives us an idea of the cash available for dividends — rose by 29% to £858m.
In fairness, I don’t expect growth to remain this strong. But I don’t think it needs to. At the time of writing, Legal & General shares trade on about nine times forecast earnings and offer a 6.5% dividend yield. I’d see that as a good level to buy, even if the economy slows.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry. 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