With a spare £500, I’d buy shares in both companies today — here’s why. 

Imperial stock: 8.68% dividend yield

Imperial Brands has the third-highest dividend yield in the FTSE 100 index, behind Rio Tinto and Persimmon. The Imperial share price has increased by 9% over the past year. The stock currently trades at a reasonable price-to-earnings ratio of 5.39. 

Tobacco stocks typically carry high dividend yields due to low capital expenditure and high profit margins. Rather than reinvesting their impressive cash flows into the business, they often distribute regular dividends to shareholders. 

There are potential moral concerns surrounding investing in Imperial stock, given the adverse health implications for consumers of its products. Moreover, creating a smoke-free generation has been a longstanding goal of the Department of Health.

The UK may one day follow in New Zealand’s footsteps. The Pacific country recently announced a ban on anyone born after 2008 from purchasing cigarettes. As UK sales make up 9% of the group’s net revenue, this could seriously threaten the Imperial Brands share price, despite efforts to diversify away from combustible tobacco with a focus on vapour and oral nicotine products. 

This wouldn’t dissuade me from buying Imperial stock, however. I see the fact that it has one of the highest dividend yields in the FTSE 100 as reasonable compensation for the long-term risks.

The company also posted encouraging financial results for 2021. Operating profit increased by 15.2% and basic earnings per share were up by 89.5% on 2020. Crucially, Imperial’s dividend increased by 1% to 139.08p per share in line with the company’s progressive dividend policy. 

Direct Line stock: 8.2% dividend yield

Direct Line is one of the top ten FTSE 250 stocks when it comes to dividend yields. The Direct Line share price is down 10% over the past year. I see this as an attractive entry point to take a position in the insurer. 

At £314.8m, motor insurance produced 54% of Direct Line’s operating profit for 2021. I believe consumer demand for its insurance products will remain strong, despite rising inflation and squeezed household budgets.

After all, driving is an essential feature of many people’s lives and car insurance is mandated by legislation. Additionally, Direct Line is a familiar household brand thanks to the company’s advertising campaigns. 

The introduction of new FCA pricing rules in January has caused uncertainty in the insurance market, leading to hikes in premiums. Direct Line acknowledges this risk in its financial results and the company has conducted scenario testing to mitigate this. 

Considering its downtrodden share price and a dividend yield over 8%, I’d buy shares in Direct Line now.  

Dividend yields for passive income

If I invested £500 evenly between the two stocks, I’d expect to receive £42.20 a year in passive income at current dividend yields.

There is speculation that Chancellor Rishi Sunak may cut the current £2,000 dividend allowance in the Spring Statement. To protect my total dividend income from future tax changes, I’d buy these equities in a Stocks and Shares ISA before the upcoming ISA deadline on 5 April. 

The post 8.2%+ dividend yields! I’d buy these 2 passive income stocks with £500 appeared first on The Twelfth Magpie.

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Charlie Carman does not own shares in any of the companies mentioned. The Motley Fool UK has recommended Imperial Brands. 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, ie Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, although sentiment has soured towards these firms, neither has yet had to cut its dividend. As a result, they offer sky-high forecast dividend yields of 8.5% and 7.1% at the time of writing.

Both companies are holdings in my income portfolio, but can either deliver the kind of big capital gains needed to help me make a million?

Direct route to growth?

Shares in FTSE 100 insurer Direct Line Insurance Group (LSE: DLG) doubled during the insurer’s first three years as a listed firm, between October 2012 and October 2015. But since then, the stock has been broadly flat.

Shareholders have enjoyed generous returns thanks to the group’s policy of returning surplus cash through additional special dividends. But tough competition in the motor insurance market, rising car repair costs and the mature nature of this business have made it hard for Direct Line to expand. The share price performance reflects this.

I recognise the headwinds facing the firm, but I remain a fan of its business model, where it sells directly to customers rather than through price comparison websites. In my opinion, this adds value to the Direct Line business. It creates a closer and more data-rich relationship with end customers, who seek the firm out rather than simply choosing the cheapest comparison quote.

Market forecasts suggest that earnings will fall by about 15% this year, before stabilising in 2020. In my view, the share price reflects this cautious outlook, with a forecast price/earnings ratio of 11.5 and an 8.4% dividend yield.

I don’t expect Direct Line to provide a fast track route to millionaire status, but I think the company’s proven track record of profitability and generous dividends could help me make a million slowly.

A changing picture

Broadcaster ITV (LSE: ITV) needs little introduction, but many television viewers don’t realise how many of the programmes on non-ITV channels are made by the group’s production business, ITV Studios. One recent example is the latest series of BBC hit Line of Duty.

Investors are worried about falling advertising revenues as viewers and adspend moves online. The group’s broadcast and online revenue fell by 7% to £489m during the first quarter, and total advertising revenue was also down 7%.

Further falls are a risk. But I believe the broadcaster is already making good progress repositioning to capture a growing share of the on-demand viewing market. Revenue from on-demand streaming rose by 22% during the first quarter, while the Studios business is also continuing to expand.

The company enjoys strong profitability, with an operating margin of about 18%. Debt remains fairly low and cash generation is good. This year’s forecast dividend of 7.9p per share looks safe to me.

ITV stock currently trades on 8.6 times forecast earnings, with an expected dividend yield of 7.1%. I believe that’s good value for such a profitable business. I may add to my holding over the coming weeks.

The post Can this 8%+ yielding FTSE 100 stock make you a million? appeared first on The Twelfth Magpie.

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Roland Head owns shares of Direct Line Insurance and ITV. The Motley Fool UK has recommended ITV. 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.

With that in mind, here are two FTSE 100 dividend stocks that appear to offer the potential for rising income payments. They could provide an impressive level of income within a Stocks and Shares ISA over a long-term time period.

Direct Line

News of a change in CEO at Direct Line (LSE: DLG) could cause a degree of instability in the short run. The insurance company’s current CEO has been at the helm for a decade, overseeing a highly profitable period for the business that has delivered relatively high dividend payments for investors.

In the current year for example, Direct Line is expected to yield 8.8%. That’s double the FTSE 100’s yield, with the potential to increase dividend payments over the medium term as it rolls out a refreshed strategy. This includes a digital-only brand that’s intended to compete with automated comparison sites.

Since Direct Line trades on a price-to-earnings (P/E) ratio of 10.7, it seems to offer a wide margin of safety. Investors appear to be cautious about its prospects, which could provide new investors with a buying opportunity. With dividends per share having grown at an annualised rate of over 10% in the last five years, the company appears to offer a mix of income and value investing potential.

Kingfisher

Also set to have a new CEO in place in the near future is DIY specialist retailer Kingfisher (LSE: KGF). Its business model and overall strategy could experience significant change over the next couple of years, since its results have been mixed for a number of years. Although it has been able to improve its efficiency, a weak trading environment in key markets has acted as a drag on its overall performance.

Despite this, its income investing potential could be impressive. Dividend payments are expected to be covered 2.3 times by net profit in the current year. Since the stock has a dividend yield of around 5%, it appears to offer a high, albeit potentially risky, dividend.

Investors appear to be anticipating further uncertainty for the business. It trades on a P/E ratio of 8.36, which suggests it offers good value for money. This could provide a margin of safety, with the stock’s risk/reward ratio appearing to be favourable.

While there may be more reliable income shares in the FTSE 100, Kingfisher offers a low valuation alongside a high and sustainable dividend. Therefore, it could provide a mix of capital growth and income prospects under a new CEO and, potentially, a revised growth strategy.

The post 2 undervalued FTSE 100 dividend stocks I’d buy for my ISA today appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Direct Line Insurance. 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.

Since Standard Life merged with Aberdeen Asset Management in 2017, shares in the combined firm have lost about 50% of their value. A generous dividend is some compensation, but how safe is this payout?

I’ve been taking a look at the firm’s latest results to find out more.

“Building blocks in place”

The company says that it’s now 75% of the way through its transformation plan, leaving it ahead of schedule. Chief executive Keith Skeoch believes that a growing focus on direct relationships with retail customers and new areas of active investment like real estate and private equity will produce long-term results.

However, the firm’s performance does not yet show any signs of improvement. Outflows from the group’s funds increased in 2018. Assets under administration fell from £608.1bn to £551.5bn during the year.

Pre-tax profit from continuing operations fell from £660m to £650m. As a result, the 21.6p dividend was not covered by adjusted earnings from continuing operations of 17.8p per share.

Is the dividend safe?

Mr Skeoch says that the plan is to hold the dividend at the 2018 level of 21.6p per share until “future financial performance confirms the sustainability” of the payout. But what if this doesn’t happen?

There are a couple of ways that Standard Life Aberdeen can raise cash. Share buybacks are currently reducing the share count, which lowers the total cost of the dividend. And the company expects to generate about £380m from the sale of a further 4.9% stake in its Indian life insurance business, HDFC.

SLA’s remaining stake in HDFC is said to be worth about £2.1bn, so this holding could be tapped for more cash if needed. The problem with this is that the group may be giving up a long-term growth asset to fund short-term needs.

I think the dividend looks less secure than it did a year ago. I’m not sure how quickly this business will return to growth. Analysts’ forecasts suggest at least one more year of falling earnings.

On balance, I think the stock is priced fairly at current levels, with a 2019 forecast P/E of 11 and an 8.6% dividend yield. I’d rate the shares as a hold, for now.

This is what I’d choose

One financial stock I’ve added to my own portfolio is home and motor insurer Direct Line Insurance Group (LSE: DLG). This well-known firm needs no introduction, but I think its strong brand and direct selling model should support continued growth.

Recent results from Direct Line suggest that even in a very competitive market, the firm is gaining market share. The number of policies written under its own brands rose by 3.2% to 7,132,000. Premium income from its own brands rose by 1.8% to 2,223m.

Increased claims losses last year meant that the group’s return on tangible equity — a measure of profitability — fell from 23% to 21.5%. But this is still a strong result that supports good cash generation for dividends.

The firm will pay a total dividend of 29.3p per share for 2018, including a special dividend of 8.3p. Analysts expect a similar payout in 2019, giving the shares a forecast yield of about 8%. In my view this remains an attractive business at a good valuation. I rate Direct Line as a buy.

The post Forget the Standard Life Aberdeen share price, I’d buy this FTSE 100 8% yielder appeared first on The Twelfth Magpie.

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Roland Head owns shares of Direct Line Insurance. The Motley Fool UK has recommended Standard Life Aberdeen. 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.

Today, I want to look at three FTSE 100 stocks from my own portfolio. Each of them has a forecast dividend yield for 2018 of about 9%. These are reputable businesses with long trading histories. You would not normally expect them to offer such a high dividend yield.

The situation isn’t without risk, but I think these stocks are offering investors the chance to lock in unusually high dividend yields and future capital gains.

Unpopular but performing well

Insurance group Aviva (LSE: AV) has been unable to win back market confidence over the last few years. The shares have fallen by about 25% in 2018, despite the group delivering a steady turnaround in the hands of recently-departed CEO Mark Wilson.

Aviva’s adjusted operating profit rose from £2,688m to £3,068m between 2015 and 2017. Annual cash remittances, which are used to fund dividends, rose from £1,507m in 2015 to £2,398m in 2017.

The dividend has risen from 15p in 2013 to 27.4p per share in 2017. This year’s forecast payout of 30.2p per share should be covered 1.9 times by earnings of 57p. That seems a decent margin of safety to me.

Broker forecasts put the stock on a 2018 price/earnings ratio of 6.5, with a dividend yield of 8.2%. This yield is expected to rise to 9.1% in 2019. I think Aviva looks too cheap and would rate the shares as a buy.

Direct growth

Direct Line Insurance Group (LSE: DLG) built its reputation by selling directly to customers, rather than through middlemen and comparison sites. The company has stayed true to this approach and this year has seen continued expansion of its own-brand customer base.

Sales have been dented this year by the loss of major partnerships with Nationwide and Sainsbury’s. A rise in weather-related claims after last winter’s cold spell also dented pre-tax profit, which fell by 13.9% to £293.8m during the first half of the year.

However, profitability remains strong, with a return on tangible equity of 21.8%. Broker forecasts have also been stable and put the stock trading on 10 times 2018 forecast earnings, with a dividend yield of 8.9%. I’m hoping to buy more.

A 9% yield from tobacco

It seems pretty certain that long-term smoking rates will continue to decline. This could eventually become a problem for big tobacco firms such as Imperial Brands (LSE: IMB).

But it’s worth keeping this risk in context. Imperial sold 255.5bn cigarettes last year. Although this was 3.6% down on the previous year, by focusing its efforts on fewer, bigger brands, it was able to lift operating profit by 5.7% to £2,407m.

The key attraction for investors here is the group’s free cash flow which, for various reasons, is normally greater than its accounting profits. This is all above board and means that Imperial can support very generous dividends.

Chief executive Alison Cooper has pledged to maintain her record of increasing payouts by 10% each year. Analysts expect a dividend of 205.3p per share for 2018/19, giving a forecast yield of 8.9%. At this level, I believe the shares are a buy.

The post 3 dirt-cheap FTSE 100 dividends stocks with 9% yields I’ve bought for 2019 appeared first on The Twelfth Magpie.

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Roland Head owns shares of Aviva, Direct Line Insurance, and Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.

Autonomous vehicles are probably already safer drivers than any humans and the technology is constantly advancing. The main reason that machines are not ruling the roads is because it takes time for regulation to catch up with the technology. This could spell disaster for Direct Line (LSE:DLG) and Hastings Group (LSE:HSTG), which stand to lose a lot of revenue as accidents could become significantly less common. At some point in the not too distant future we could find that legislators deem humans too dangerous to drive on our roads!

Sooner than you think?

Of course this is a speculative prediction, but we have already seen the market begin to react to this as a probable trend. Car insurance stocks have had a tough year with some starting to anticipate difficult times ahead. You may think this is a bit premature, if self-driving cars take 30 years to hit the road, then there is still a good deal of value to draw from these companies. However, I am bullish on how quickly the technology will become accepted, and think we could see autonomous vehicles on UK roads within 10 years. My belief is that Uber, among others, will be responsible for this technology becoming widespread. We have already seen how focused Uber has been in driving costs lower and achieving growth, imagine how excited it must be about the prospect of not having to pay drivers.

Two to avoid

Direct Line also offers home insurance, but this is small compared to its car insurance and recovery services. It is a very good income stock and with payouts in the high single-digits has been one of the highest-yielding stocks in the FTSE 100. It regularly pays three dividends per year. So why the  flurry of broker downgrades this year? That is partially due to industry conditions, but also, I believe, because of the significant risk that is posed by driverless-cars. 

Industry peer Hastings Group has been considerably growing its top-line revenue over the past few years and may be starting look like a bargain. On closer inspection though a lot of this growth is coming at the expense of its margins. This is acceptable in an accelerating market but when there is so much competition, this will only increase the risk to the business in difficult trading conditions.

Both of these companies will probably continue to produce decent returns for years to come but I’d be very concerned about a falling share price.

Can I benefit from autonomous vehicle stocks?

Most of the big players in this market are American companies and unfortunately Uber is privately owned. I’d consider buying AB Dynamics which tests autonomous vehicles and is likely to see a big increase in its business over the coming years, if my predictions are correct. It is trading on a lofty price-to-earnings ratio of 30 but it reported a ‘significant’ earnings beat last week so I think its momentum will continue.

The post Why self driving cars could spell disaster for these two insurance stocks appeared first on The Twelfth Magpie.

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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.

With that in mind, here is a FTSE 250 share that appears to be overpriced in spite of improving recent performance. It could be worth selling in favour of a FTSE 100 stock that seems to offer an enticing income outlook.

High valuation

Reporting on Friday was international home repairs and improvements business Homeserve (LSE: HSV). Its performance in the traditionally quieter April-July period has been positive, with it trading in line with expectations. It remains on track to deliver good growth in the 2019 financial year, and has attractive opportunities in all of its geographies. It expects continued strong organic growth in North America, while its acquisition pipeline could help to accelerate its sales performance.

Looking ahead to the next two financial years, Homeserve is forecast to post a rise in earnings of 9% and 11% respectively. This is an impressive rate of growth, which normally would be highly appealing to a potential investor. However, with the stock trading on a price-to-earnings (P/E) ratio of around 29, it appears to be fully valued at the present time.

Certainly, there is scope for further growth to be achieved in future years. But with such a narrow margin of safety, the investment appeal of Homeserve seems to be somewhat limited.

High income return

By contrast, the investment potential of home and motor insurance specialist Direct Line (LSE: DLG) seems to be high. The company has a dividend yield of over 9% at the present time, which makes it one of the highest-yielding stocks in the FTSE 100. Although this figure includes special dividends, the performance of the business is set to remain robust over the next couple of years, with earnings growth forecast for both the current year and next year.

With the motor insurance industry appearing to successfully adapt to changes in the Ogden discount rate, its prospects appear to be bright. Direct Line has been able to grow its partnership portfolio in recent quarters, while its performance in the first quarter of the current year showed that it is operationally sound. Further investment in its digital capabilities could lead to an improvement in its financial performance over the medium term.

Since the stock trades on a P/E ratio of around 13, it appears to offer good value for money. With the FTSE 100 and FTSE 250 being close to record highs, it is all too easy to buy shares that are overpriced. However, Direct Line’s income return and capital growth could be impressive in future years.

The post Why I’d sell this overpriced FTSE 250 share and buy this FTSE 100 dividend instead appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Direct Line Insurance. The Motley Fool UK has recommended Homeserve. 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.

Likewise, the Brexit process and the geopolitical risk in various parts of the world could cause investor sentiment to come under pressure.

Therefore, obtaining a mix of capital growth potential and income returns could be a shrewd move. With that in mind, this income stock could be worth buying alongside a growth company that reported positive results on Thursday.

Strong performance

The growth company in question is cloud communications software and solutions provider IMImobile (LSE:IMO). The company’s trading update for the year to 31 March showed a rise in organic revenue of 45%, which was ahead of expectations. This helped to deliver a year-on-year gross profit increase of over 17%, with net profit being in line with expectations after the anticipated investment in various growth initiatives.

The company’s recent acquisitions appear to provide the potential for a move into new markets. There has also been further progress in cross-selling opportunities, while ongoing product innovation and the development of intellectual property could have a positive impact on the company’s long-term outlook.

With IMImobile forecast to generate growth in earnings of 22% in the current year, it appears to have a strong outlook. Despite this, it trades on a price-to-earnings growth (PEG) ratio of 1, which suggests that it may be undervalued by the market. This could mean that there is capital growth ahead for the stock, with what appears to be a solid strategy having the potential to generate rising profitability in future years.

Improving performance

While growth stocks could hold appeal at the present time, so too do dividend stocks such as Direct Line (LSE: DLG). It has a dividend yield of over 8% at the present time, which is around three times the rate of inflation. This should ensure that it offers a relatively high total return if the FTSE 100 fails to find a clear trend in the coming months. Given the volatility of late, there is a good chance that this could be the case.

Since Direct Line is forecast to grow its bottom line by 8% this year and by a further 3% next year, it seems to be delivering on its strategy. It trades on a price-to-earnings (P/E) ratio of around 13, which suggests that it offers good value for money at the present time. And with dividends being covered 1.1 times by profit, they appear to be affordable given the company’s current outlook.

Although the motor insurance industry has experienced an uncertain period due to changes in the Ogden discount rate, the prospects for growth seem to be fairly positive. As such, Direct Line now seems to offer impressive income and capital growth potential for the long term.

The post One FTSE 100 dividend stock and one growth stock I’d buy today appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Direct Line Insurance. 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.

Solid performance

Reporting on Wednesday was manufacturer, recycler and distributor of PVC products Eurocell (LSE: ECEL). The company has experienced challenging trading conditions in the 11 months to 30 November, but is on track to meet full-year guidance. It has experienced good sales growth in the new-build marketplace, while it continues to build its prospect pipeline in the Profiles division. Similarly, trading in the Building Plastics division has been robust, although like-for-like growth rates are slightly below those of the first half of the year.

The company continues to mitigate the increasing cost inflation it is seeing for a range of raw materials including resin. However, there remains a time lag in capturing the benefit. Despite this, the firm is making good progress with its strategy and has been able to invest in business expansion, notably through the acquisition of Security Hardware.

With a dividend yield of 4.2%, Eurocell appears to have dividend appeal at the present time. With dividends being covered 2.3 times by profit, next year’s forecast rise in shareholder payouts of 8.8% appears to be highly affordable. Furthermore, with the company forecast to grow its bottom line by 5% in the current year and by a further 6% next year, its price-to-earnings growth (PEG) ratio of 1.5 indicates that it could offer high levels of capital growth in the long run.

Low valuation

Also offering impressive income prospects is insurance company Direct Line (LSE: DLG). It has a dividend yield of 8.2% at the present time, which includes special dividends. Clearly, there is no guarantee that these will continue to be paid. However, the company has a solid track record of paying them and is expected to do so over the next couple of years. Such a high dividend yield means that the firm’s income return is highly likely to remain well above inflation – even if the price level rises at a rapid rate over the medium term.

As well as its income prospects, Direct Line also has capital growth potential. The company trades on a price-to-earnings (P/E) ratio of just 12.7 at the present time. This suggests that there could be a wide margin of safety on offer following its 5% share price fall in the last three months. As such, with a mix of income potential, low valuation and what is a dominant position within its key markets, the stock appears to offer a favourable risk/reward ratio for the long term. This means that now could be the right time to buy it.

The post 2 high-growth dividend shares you may regret missing out on appeared first on The Twelfth Magpie.

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Peter Stephens owns shares in Direct Line. 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.

With that in mind, here are two companies which may see their share prices rise due to their dividend growth potential.

Upbeat update

Reporting on Monday was diversified food producer and retailer ABF (LSE: ABF). The company has benefitted significantly from a weaker pound during the course of its most recent financial year. Most of its profit is generated outside of the UK, and the prospect of further uncertainty for the UK economy means that it may continue to benefit from currency fluctuations

As well as this, the company’s operating performance has also improved. It has been able to grow its Primark retail brand even with the UK economy experiencing consumer weakness. Sales from Primark in the UK were 10% higher, and this shows that a squeeze on consumer spending from higher inflation may push price-conscious shoppers to budget brands such as Primark. The division’s operations in the US are also expanding, while its growth potential in Europe remains high.

Alongside Primark’s performance was increases in the profitability of all of ABF’s other divisions. They provide it with a high degree of diversity and mean that if Primark experiences a difficult quarter, they may be able to offset its performance in the short run.

Dividend growth

Although ABF currently has a dividend yield of just 1.3%, its potential to raise shareholder payouts at a rapid rate is high. Its payout ratio stands at just 33% which, for a large and mature company, is relatively low. It could easily afford to pay out twice its current level of dividend and still have sufficient capital to invest in future growth opportunities.

Furthermore, with the company’s bottom line due to rise by 18% this year and by a further 10% next year, dividend growth could easily surpass the rate of inflation in the long run. And with a price-to-earnings growth (PEG) ratio of 1.5, it seems to offer value for money too.

High yield

With a dividend yield of 6.9%, insurance company Direct Line (LSE: DLG) continues to offer an inflation-beating level of income for its investors. The company also has scope to raise dividends by at least as much as inflation in future years. It currently has a dividend coverage ratio of 1.2, which suggests that dividend growth could match earnings growth over the medium term. With the company’s strategy being relatively sound and it having a dominant position within the UK motor insurance sector in particular, its prospects for earnings growth remain bright.

Certainly, there have been challenges within the motor insurance industry in recent years. Notably, there was the change in the Ogden discount rate which was applied to personal injury claims. However, Direct Line seems to have been able to pass this cost on to consumers and remains a strong income stock for the long term.

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Peter Stephens owns shares in Direct Line. 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.