With investors rushing to buy UK defence stocks, one FTSE 250 growth star stands out to me.

I just bought Qinetiq (LSE:QQ) for my SIPP as a long-term compounder.

Qinetiq paid £43m to shareholders in 2022/23. The dividend per share is double what it was a decade ago. But there’s more.

BAE the best?

BAE Systems is one of the biggest stock market gainers from the West’s move to aid Ukraine with military support. It’s Britain’s largest defence company, after all.

It remains the UK’s most-searched for stock in 2023, according to Google Trends.

But with so many investors throwing their cash into BAE shares, I see the £10+ per share price as too high. Now I’d have to pay 17 times annual earnings for BAE.

Instead, my eyes alighted on a company a fraction of the size. QinetiQ is a £1.8bn market-cap defence specialist with £1.6bn in revenue. It has a solid and growing dividend, and humming net profits.

A Common Wealth report cited by The Guardian found Qinetiq pays just 4.5% of its own research and development costs. The rest is shouldered by increasing UK government support for aerospace and defence companies.

That’s led to a chunky 23.2% return on investor capital, reporters wrote.

Breakups are tough

So what are the major risks? A takeover or buyout seems most likely to top that list. Those deals don’t always work out best for the private investor.

In 2019, the UK government waved through the £4bn sale of British aerospace firm Cobham to a private equity giant.

Two years later, AIM-listed TP Group was taken out by Science Group for a song. The US engineering giant Parker-Hannifin Corp snapped up the £1.6bn-a-year revenue Meggitt in 2022.

That cleared out some of the largest UK rivals to Qinetiq. But defence is a global industry with massive players.

Where the upside lies

Qinetiq is a multinational with divisions in the Middle East, Australia, and the US.

Chief executive Steve Wadey said on 12 September that the war in Ukraine led to growing interest in its key technologies. These include using laser energy to target airborne threats.

The Ministry of Defence (MoD) also noted something very interesting last year: “QinetiQ…have built a phase-combined laser with the ability in the future to scale fire-power levels”.

Intellectual property and patents are critical to defence companies’ ability to turn potential into profit.

Qinetiq says its dividends will rise from today’s 7.7p per share to 8.59p by 2025.

The company’s inconsistency in upping these payouts may have dampened enthusiasm in the past. But I see a change in strategy here.

It is one of only three firms invited by the MoD to Porton Down in November last year. There it took part in the UK’s first high powered long-range laser weapons trial.

Defence stocks will be critical to managing the uncertain world ahead. I spy a long-term growth and dividend opportunity here, and that’s why I bought Qinetiq.

The post I just bought this FTSE 250 defence star as war breaks out appeared first on The Twelfth Magpie.

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Tom Rodgers has positions in QinetiQ Group Plc. The Motley Fool UK has recommended BAE Systems and QinetiQ Group Plc. 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.

I’ve scoured the list of the largest FTSE companies that have raised their dividends every year for at least five years, and have also seen their share price rise over the same period.

It wasn’t an easy task.

Of the largest UK public companies, only a handful meet this strict criteria.

Growing dividends at the same time as growing profits is an exceedingly difficult thing to achieve.

Why? Well, if a business commits too much of its free cash flow to paying out dividends to shareholders, that money can’t be used to expand its business. It also can’t use that spare cash for investing in new technology or acquisitions. These moves can often boost revenues or profits.

But the companies that manage the task are going straight to the top of my watchlist. If I want to have enough cash to retire, I’ll need an ISA or SIPP stacked full of these compounding giants.

Growing by buying

Bunzl (LSE:BNZL) is not the kind of flashy stock beloved by forum posters who debate its price day in and day out. But it is a consistent and predictable profit-making machine.

The £10bn FTSE 100 industrials company sells its products in more than 30 countries. These products include medical gowns, disinfectants, and food packaging. By themselves, these may goods with low profit margins. But they make Bunzl an incredibly important supplier for thousands of businesses worldwide.

Bunzl also has a successful acquisition strategy, spending £4.5bn to buy up more than 190 smaller businesses since 2004.

Since 2017, net profits — also called a company’s “bottom line” — have grown by 90%.

So let’s talk about the dividends on offer here. WIth a share price of 2,492p at time of writing, and four payouts a year of 57.72p, that works out to a 2.15% dividend yield. It’s not a king’s ransom by any stretch.

But Bunzl has grown its payouts to income investors for more than 23 years! The share price is also 40% higher in the last five years.

While this is unlikely to light anyone’s world on fire, it has been consistent and predictable. For me, that’s crucial. I’ve wasted enough money on illiquid, lottery-ticket stocks to know the difference between promises and results.

Long-term strategy

As a long-term compounding growth investor I want to avoid FTSE companies with patchy or inconsistent records.

I have to think like Warren Buffett and remember that I’m buying a business — not just a story. This is in my mind every time I invest in dividend stocks and shares.

That high share price of almost £30-a-pop may put off newer or younger investors who are used to being able to buy fractional shares in low-cost broker accounts. I could consider this a downside, as it may deter fresh capital from coming into the business.

But as we heard from HMRC in October 2023, fractional shares don’t qualify for the tax advantages of being held in an ISA.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

I’m focused on steadily growing my net worth over the next 15 years or so before I retire. I’m not a joyless automaton, but I’ll leave my gambling to the odd bet on the football rather than risking my retirement cash.

The post FTSE dividend hero alert! I think I can retire on these UK shares appeared first on The Twelfth Magpie.

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Tom Rodgers has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl Plc. 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.

British American Tobacco (LSE: BATS) is one of the only FTSE 100 shares that can be called a ‘dividend yield hero’.

I focus on these types of companies quite a lot. That’s because I want strong compounders for my Self-Invested Personal Pension (SIPP). Since it offers a 9%+ dividend yield, this stock seems to fit the bill.

One of the major things that British American Tobacco has going for it is a consistent dividend record.

The company has managed to grow its payments to income investors for the last 23 years in a row. That makes it one of only a handful of FTSE 100 stocks with this impressive record.

9% dividend yield for life?

The British American Tobacco share price has been hammered over the last year and a half, with markets repricing the stock down from $45 to just above $30. But as a consumer defensive business, British American Tobacco could attract more attention as the UK heads closer to a recession. Investors tend to shift out of riskier plays and into consumer defensives in uncertain economic times.

But readers will be here to focus on the 9.2% dividend yield, so let’s cover that in detail now.

In 2017, the company paid £1 per share in dividends. By 2019, that had more than doubled to £2.03 per share. This year, it expects to pay investors a total of £2.39 per share.

The company also recently restated its long-term strategy to pay investors 65% of profits as dividends.

Because so few UK stocks increase their dividend payments over more than two decades, it makes British American Tobacco quite an interesting stock to track.

FTSE 100 downsides?

We do need to mention the potential downsides to investing in 9%-yielding shares like British American Tobacco.

One thing that weighs on my mind is the pretty massive amount of net debt the company carries. At last count, in 2023, that stood at £38bn. Yes, it is lower than the £45bn pile in 2017, so debt has been coming down.

But with interest rates at historic highs, that means the interest payments on debt will be larger. Higher interest payments for large debt piles suck cash out of a business and can be a drag on profits.

There are also ethical considerations to be aware of for this stock. Personally, as a former smoker, I honestly wish I’d never started.

Rising concerns about young people getting hooked on vaping may add to jitters about whether to invest here, too. The company says it aims to sell £5bn-worth of these products by 2025.

Future promise

Let’s switch back to the company’s financial prowess for a moment.

The company forecasts that it will be able to generate £40bn of free cash flow over the next five years. To me, that looks like very good news for the dividend and the payout ratio.

It can be tricky when it comes to buying shares in a company that sells controversial products. Every investor will have to make their own judgement call. But that 9% dividend yield and 23-year history of upping payouts may be too juicy to ignore.

The post 9% yield FTSE 100 shares for my SIPP! appeared first on The Twelfth Magpie.

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Tom Rodgers has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.

A cheap stock with a sky-high dividend can be enormously enticing. This is especially the case when markets are in a funk as they are now. Fortunately, I think I’ve found a great example of a cheap FTSE 100 dividend share that’s worth buying today.

Monster dividend yield

Based on the current consensus among analysts, insurer and asset manager M&G (LSE: MNG) offers a stonking forecast dividend yield of 8.9% for FY22. That’s one of the biggest in the FTSE 100. It’s also well over double the yield generated by the index as a whole.

Of course, the question that any dividend hunter has to ask is how sustainable the bi-annual payments actually are. On this front, I think investors can sleep safely (for now). 

The FTSE 100 member’s recent set of full-year results were certainly well received. Although adjusted operating profit dipped from £788m to £721m, the firm was able to confirm that it hit all its commitments since demerging from giant Prudential.

These included total capital generation of £2.8bn in two years, “well ahead” of the £2.2bn target set for the end of 2022. On top of this, the company also hit its costs savings target of £145m one year ahead of schedule. 

As a result of this, M&G announced it would be returning £500m back to holders via a share buyback. No wonder the share price jumped on the day. 

Decent outlook

I think this form could continue in 2022. Through a combination of acquisitions and product launches, the £5.5bn-cap is expanding its services in the UK and Europe. A resolution to the conflict in Ukraine and a full post-pandemic recovery could also see more savers’ money finding its way to the company.

Looking further ahead, M&G stands to benefit from an ageing population that’s realising how insufficient the State Pension might be for their desired lifestyle on retirement.

Risks to consider

Naturally, I’d be a complete fool (rather than a Fool) if I didn’t consider the potential risks here.

Unsurprisingly, there’s no guarantee that dividends will always be paid. The global pandemic, while a once-in-a-century event, showed us that the income stream is usually one of the first things to be sacrificed in an effort to shore up cash. As far as M&G is concerned, it’s worth mentioning that profit is expected to cover the FY22 payout just 1.1 times. That’s already rather low.

Away from the dividends, I would also need to be comfortable knowing that M&G’s share price performance will likely be heavily correlated with the health of the UK economy. That’s not necessarily an issue for long-term investors like myself. However, knowing that the stock is still 6% below where it stood when M&G was listed in 2019 is a sober reminder that my capital can fall as well as rise in value.

Cheap FTSE 100 stock

Of course, investors might argue that a lot of risks are already in the price. M&G shares change hands at just 10 times forecast earnings. That looks pretty reasonable to me. Yes, there are similar companies trading on even cheaper valuations in the UK market. However, the dividend stream isn’t quite so big.

Overall, I consider this a good candidate if I was looking to build a diversified, income-focused portfolio.  

The post 8.9% yield! 1 cheap FTSE 100 dividend share to buy today appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential. 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.

High dividend yields aren’t uncommon, but the higher they go the less sustainable they tend to be. Now, as inflation rises in the UK, investors like me are under pressure to continue earning a good return on their money. Inflation has reached three-decade highs of 5.5%. The Bank of England (BoE) predicts that it will reach 7.25% in the spring.

But I’m not panicking. There are lots of UK companies with dividend yields above even this high level of inflation. The one I’m considering is even on the FTSE 100. It’s M&G Financial Services (LSE: MNG). 

A little background

M&G was a subsidiary of Prudential, a financial services conglomerate, but was split off in late 2019. This was part of Prudential’s strategy to concentrate on Asia’s fast-growing developing markets. I do not believe for a moment that Prudential’s decision to split from M&G is a reflection of the latter’s earnings prospects. In my opinion, M&G has the potential to provide significant long-term shareholder returns.

Since the 2008 financial crisis, ordinary financial products have provided a poor return to savers. To aid the revival of the economy, the Bank of England held rates at historic lows. Savers and investors have had to look for other ways to get a reasonable return on their money and demand for wealth management services, such as those provided by M&G, rose as a result.

The Bank of England is boosting interest rates once more. However, this has yet to be reflected in a significant increase in savings rates. Interest rates are expected to continue substantially below historical averages. I don’t anticipate things to get much better for savers. Even in the most optimistic scenario, interest rates will remain below 1.8% until 2024, according to Lloyds.

Set apart from the rest

I wouldn’t only buy M&G because typical savings products are expected to continue to provide weak returns. The FTSE 100 company has a long history of competently delivering financial solutions for seniors. This could create significant profits in the years ahead. The population of the UK is ageing, with one-in-six expected to be 65 or older by 2050, leaving M&G and its competitors with plenty of business to win.

M&G will still have to put in a lot of effort considering the level of competition it faces. The financial services business is tough, and any evidence of underperformance compared to competitors might be disastrous. However, I think I can rest easy knowing that M&G has a proven track record of providing good returns to its customers.

8.5% dividend yield

Furthermore, when it comes to reward-to-risk, I believe M&G’s stock price seems very appealing at current levels. The wealth manager is now trading at a forward P/E ratio of 10.3 times, which is close to the recognised value watermark of 10 times.

But for me, the biggest draw is its dividend yield. Right now, it pays a whopping 8.5%, miles above the FTSE 100 average of 3.5%. This is a stock I’m purchasing today and holding for a long time.

The post A ‘rock-solid’ FTSE 100 company with an 8.5% dividend yield appeared first on The Twelfth Magpie.

More reading

• Here’s how I’m targeting £9,945 a year in second income from this overlooked FTSE gem
• How has M&G become one of the FTSE 100’s hottest dividend stocks? 5 reasons..!
• This stunning FTSE 100 dividend stock just doubled my money in 3 years – time to buy more?
• A handful of 5%+ yielding UK shares worth considering for a Stocks and Shares ISA
• Here’s how an empty ISA today could be earning £19,343 in passive income annually just a decade from now!

James Reynolds 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.