Once again, the annual Equity Gilt Study from Barclays — which focuses on long-term returns in the UK and US — has shown just how important it is to stay in the market and re-invest all that you receive if circumstances allow. £100 invested in 1945 might only be worth £288 now but if the income received over that time had been used to buy more shares, it would now be worth an astounding £6,294.

Solid payer

Anglo-South African life assurance and banking giant Old Mutual (LSE: OML) is a good example of a stock I’d consider investing in for its bi-annual payouts.

Today’s update, released to coincide with the company’s AGM, confirmed that the £12.6bn cap’s businesses continue to trade “in line” with those expectations announced back in March alongside its full-year results. 

First quarter net client cash flow at Quilter — the wealth manager that will separate from Old Mutual and list on the London and Johannesburg stock exchanges in June — has continued to be strong. At £1.6bn, this was 14% higher than over the same period in 2017.

Although assets under management fell by 2.4% to £111.6bn over the reporting period thanks to “negative market movements“, the company stated that this compared favourably to the 8.2% decrease in the FTSE 100. That said, CEO Paul Feeney did remark on likely “uncertainties in equity, bond, and currency markets” as the full impact of Brexit becomes clearer. 

Q1 performance at South African banking group Nedbank was also as expected.

Despite rising 31% over the last year — impressive for such a large company — Old Mutual’s stock still trades on a fairly undemanding valuation of 11 times forecast earnings. The 3% yield is somewhat average but it is expected to be covered three times by profits — the kind of security that holders of higher yielding stocks in the FTSE 100 can only dream of. Speaking of which…

Shaky foundations

In contrast to some of my Foolish colleagues, I remain wary of communications behemoth and top table peer Vodafone (LSE: VOD). 

The 6% yield on offer is certainly attractive, but this massive payout is still not covered and unlikely to be for another couple of years. That’s fine if you’re invested in some kind of diversified income fund or a simple FTSE 100 tracker but, for those who choose to own a more concentrated portfolio, I can’t help thinking that’s a sufficiently long time period for new problems to arise.

Bulls will point towards the completion of Project Spring as a catalyst for Vodafone’s fundamentals to improve. They may also reflect on the recent jump in mobile data traffic (as reported in February) and the fact that Vodafone now claims to be the fastest growing fixed broadband provider.

While this may be true, I remain concerned by the Newbury-based firm’s huge debt pile and the inevitability of further capital expenditure. In September last year, net debt stood at £32bn, well over half its market capitalisation.

Vodafone announces full year results on May 15. Shares might rally if predictions of organic adjusted EBITDA growth of “around 10%” and €5bn+ free cash flow are met but, on 22 times expected earnings for next year, I’ll be steering clear.

The post One FTSE 100 income stock I’d consider buying in May and one I’d sell appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the 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.

Enhanced value and good results

Like doves being released from a cage, the newly created individual companies will be free to soar under new, unrestrained and invigorated management teams, delivering value to Old Mutual’s current shareholders. It’s a good theory and a powerful reason to hold the stock now, especially considering the great full-year results released today.

Compared to 2016, pre-tax adjusted operating profit moved up 22% last year and adjusted earnings per share lifted 25%. The directors displayed their confidence in the outlook by pushing up the full-year dividend by 17%, which is great progress for existing shareholders. Yet, despite these good financial figures, Old Mutual experienced challenging macroeconomic conditions in its largest market of South Africa through 2017, with “weakness in consumer and business confidence creating a tough environment for banking, long-term investment and savings.” Meanwhile, in the UK the company said it delivered a “resilient operational performance” despite a weak currency, political uncertainty around Brexit and the general election, and regulatory developments affecting financial services.

The firm is on course to complete most aspects of the managed separation of its businesses by the end of 2018. Chief Executive Bruce Hemphill said in today’s report: “The process has already delivered significant value through cost and debt reduction.” The aim is to “unlock and create significant long-term value” for shareholders, which he believes is “trapped” in the group structure. The separation should remove costs layered in the existing set-up.

Attractive valuation

Three underlying businesses will be set free — Old Mutual Emerging Markets, Nedbank and Old Mutual Wealth. OM Asset Management was the first division to go, having been separated from the firm during 2017. I think the strategy is a good example of how imaginative management thinking can turn a dull old firm into an interesting-looking investment proposition.

Meanwhile, even in this advanced stage of change the valuation still looks attractive. In 2017, the adjusted net asset value per share rose 6% to around 242p, which is close to the current share price of 252p. The price-to-earnings ratio sits just above 10 and the dividend yield around 2.8%, with the payment covered almost three-and-a-half times by current earnings. This does not strike me as a demanding valuation.

Good trading and the impetus created by the company’s bold separation strategy have combined to drive the stock up around 35% since November, and I reckon there could be more to come from capital appreciation and dividend income for investors willing to embrace the uncertainty of the company’s current state of flux. Perhaps this is one to tuck away for your retirement fund.

The post Should you buy the value and growth offered by FTSE 100 stock Old Mutual plc? appeared first on The Twelfth Magpie.

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Kevin Godbold 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.

With that in mind, here are two companies with high dividend growth potential. Buying them now could be a shrewd move.

Long-term potential

Reporting on Wednesday was Frenkel Topping (LSE: FEN), a specialist independent financial advisor and asset manager focused on asset protection for vulnerable clients. The company has recently been undertaking a detailed review following changes to its management team. It now believes that the potential addressable market available to the company is broader than that which it has previously targeted. It has therefore made investments in its cost base in order to restructure the business.

This could provide the business with higher sales and profit growth potential in the long run. Certainly, it will lead to reduced profitability in the short run, and that could be why the company’s shares are down 10% following the update. However, with a larger potential market from which to seek new business, the company’s future could be brighter following its strategic review.

In terms of its income prospects, Frenkel Topping currently has a dividend yield of 2.5%. While this may seem relatively low, the shareholder payouts are covered around 2.4 times by profit. This suggests that there could be significant growth in dividends in future years. With the company now having a larger market to target, its financial performance could improve in the long run.

Increasing dividends

Also offering the potential for higher future dividends is wealth management specialist Old Mutual (LSE: OML). It is currently undergoing a major restructuring which will see it split into four separate entities. This is being undertaken in order to improve its efficiencies through the prospect of lower costs. It also means there are asset disposals, the latest one of which was for the company’s Single Strategy division for £600m.

With a dividend yield of 3.2%, Old Mutual offers a real income return at the present time. However, in the long run its dividend growth rate could be relatively high. Its shareholder payouts are currently covered three times by profit, which suggests that they are highly affordable and very sustainable.

The company’s price-to-earnings (P/E) ratio of 10.4 suggests that there is a wide margin of safety on offer for new investors. This means that there could be significant upside potential in the long run. In the near term there could be some weakness as investor sentiment may decline to some degree ahead of what is a major change for the business. But with a low valuation, cost-cutting drive and rising dividend, it could be a strong performer in future years.

The post 2 high-growth dividend shares you might regret not holding appeared first on The Twelfth Magpie.

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Peter Stephens owns shares in Old Mutual. 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.

I see that taint as still holding them back, and the shock of the UK’s vote to leave the EU didn’t help. But there are growing signs that the long-term health of the sector is starting to shine through.

Old Mutual (LSE: OML) shares have recovered reasonably well since 2016’s Brexit shock, but at 222p today they’re still below their pre-referendum level — though a 4.7% rise on the day on Tuesday is surely a good sign.

It came after the company revealed the disposal of its Single Strategy asset management business for £600m. The sale, to TA Associates, will see the chief executive of the division, Richard Buxton, remaining at the helm.

Focused strategy

Chief executive of Old Mutual Wealth, Paul Feeney, said “As we outlined in the Showcase event in November, the Single Strategy business is less closely aligned to our goal of becoming the UK’s leading wealth manager.”And that appears to emphasise the still-emerging direction across the sector towards a focus on key businesses and away from diversity.

To my mind, that can only be a good thing, and I’m hoping the markets will open up to what I see as renewed optimism for the insurance business during the course of 2018 — which I think is apparent from a look at the fundamentals.

With modest earnings growth forecast for this year and next, Old Mutual shares are on forward P/E multiples of under 10. On top of that there are thrice-covered dividend yields of around 3.5% on the cards.

It still faces some uncertainty due to a chunk of its focus being on emerging African markets. The economy of its native South Africa faces its own testing times and many investors will prefer to stick to the relative safety of solely UK insurance. But on its current valuation, Old Mutual looks like a buy to me.

Best in sector?

What’s the best insurance company in the business? The one I’ve gone for myself is Aviva, but Legal & General (LSE: LGEN) is up there at the top and is one of the biggest dividend payers in the sector.

We’re looking at a similar share price performance, with a sharp Brexit dip followed by a solid recovery, yet pretty much flat over two years at 270p. And Legal & General shares are also on low P/E ratios based on current forecasts — a bit higher than Old Mutual’s at between 10 and 11, but that’s still below the long-term FTSE 100 average of around 14.

And the dividends? The City is predicting yields of 5.7% this year followed by 6% next, and they’d be around 1.7 times covered — and if that doesn’t make that low P/E valuation look like a bargain, I don’t know what will.

Those forecasts look to be on the money too as the company’s latest update in early December told us to expect “a record year in 2017” after sales topped £6.2bn to date with “significant” outperformance in retail markets.

I reckon Legal & General could be one of the best long-term dividend stocks on the market now.

The post Why I’d buy Legal & General plc and Old Mutual plc ASAP! appeared first on The Twelfth Magpie.

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Alan Oscroft owns shares in Aviva. 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.

For the 12 months to September 30, turnover increased 11.7% to €18.5bn on a constant currency basis and underlying earnings before interest, tax, depreciation and amortisation increased 12% to €1.1bn.

The company was able to report double-digit earnings growth even though the year was a bumpy one for its airlines. Problems at Tui’s owned airline, Tuifly and the collapse of Air Berlin led to EBITDA losses of €39m.

And management is expecting another healthy period next year. According to today’s update, demand for trips by holidaymakers across Europe to destinations such as Thailand, Cape Verde, and Cyprus, as well as Turkey and North Africa, which tourists had been avoiding due to terrorist attacks, remains “strong.” Tui is expecting EBITDA growth of at least 10% next year. 

Rebuilding the business

Its phenomenal growth in recent years is a result of the company’s decision to move away from being a simple tour operator to focus on a model whereby it owns each of the component parts of a holiday, including hotels, cruise ships and planes. 

This verticle integration allows the group to offer customers more for less, cutting out the middleman. According to City analysts, pre-tax profit is expected to hit £911m for the financial year ending 30 September 2018, up 121% from the £410m reported for the year ending 30 September 2015. 

Despite this growth, shares in the travel group do not look overly expensive. Based on current growth forecasts (City and management), the stock is trading at a forward (year-end Septmeber 2018) P/E of 12.9. With earnings per share set to grow at a double-digit rate, I think this multiple undervalues the business. 

In addition to the low valuation, the shares also support a dividend yield of 4%. The payout is covered 1.7 times by earnings per share. 

Overall, as an income and growth play, I believe there’s no better buy than Tui. 

Making room in the portfolio

To make room for it in your portfolio, I recommend selling South Africa-based financial services company Old Mutual (LSE: OML). 

This has been a perennial under-performer. Over the past five years, the group has struggled to grow revenue and earnings per share have gained only 11%. City analysts are expecting the business to report earnings growth of 9% for this year, although the bulk of this will come from the group’s break-up. 

To unlock value, management is hiving off the firm’s UK wealth division and will list a South African holding company on the Johannesburg Stock Exchange in early 2018. If correctly executed, City analysts believe that the break-up sum-of-the-parts valuation is around 260p, 30% above current levels. 

However, even though Old Mutual could be worth 30% more by the end of next year, after the break-up, I’d rather put my money on Tui due to its steady growth and more predictable outlook. Even Old Mutual’s 3.6% dividend yield, which is covered three times by earnings per share, isn’t enough to convince me otherwise.

The post One FTSE 100 4% yielder I’d sell to buy Tui AG appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no stock 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.

Shares in the FTSE 100 company are down 5% year-to-date against a tough political and economic backdrop in South Africa, but I reckon the stock has been oversold as a major restructuring could help its shares push into higher ground.

Managed separation

The group is going through a “managed separation” which will see it split along its four underlying businesses: asset management, wealth management, insurance and banking. This strategy has the potential to unlock value for shareholders, as the value of its individual business units could be significantly more than the company as a whole.

With its shares trading at just 9.1 times its expected underlying earnings this year, a conglomerate discount seems to explain the valuation gap between itself and sector peers. What’s more, asset realisations allow the group to sell of its more highly-valued asset management business, locking in high prices in order to recycle capital to invest in its core emerging markets business.

Breaking up could bring long-term benefits too, as having standalone units enables each business to focus on what’s best for itself without being troubled about the broader impact on the larger group. The removal of central operational and debt costs is also expected to deliver annualised cost savings of £31m.

Meanwhile, City analysts may previously have been too pessimistic about Old Mutual’s near-term growth prospects as they’ve hastily revised their expectations upwards in recent months. The current consensus analysts’ forecast for underlying earnings per share in 2017 is 21.5p, up from 20.1p a year ago.

Dividend growth

Shares in infrastructure group John Laing Group (LSE: JLG) haven’t fared much better. After the company announced a £25.5m writedown on its long-troubled Greater Manchester Waste project in August, shares in the company have since lost more than 15% of their value.

The writedown was bigger than many analysts had previously expected, meaning the company would expect to earn a much smaller profit from the investment than it had earlier forecast. But although the Manchester project is one of its biggest single investments, representing roughly 8% of its investment portfolio at the end of 2016, it is only one of many.

Taken together, the company said its portfolio was performing “in line with expectations”. As such, the firm’s net asset value (NAV) has continued to trend upwards, with a 2.5% gain in the six months to the end of June, demonstrating its still-attractive outlook for long-term value creation.

Looking ahead, further growth seems likely as the global need for infrastructure is growing fast and governments are increasingly turning to the private sector for investment. Reassuringly, John Laing has a strong pipeline of investment opportunities in place, with commitments to date of £340m, well ahead of its original guidance for 2017 of approximately £200m.

But despite the upbeat outlook, John Laing currently trades at a forward P/E of just 7.6.

The post 2 low P/E stocks I’d buy and hold for the next 10 years appeared first on The Twelfth Magpie.

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Jack Tang has no position in any 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.

Bright future

Reporting on Thursday was international designer, manufacturer and distributor of innovative floor coverings Victoria (LSE: VCP). The company released an AGM update which said that it is continuing to make good progress in its key UK, European and Australian markets. It’s also on track to meet all of its objectives for the full year, while continuing to seek acquisition opportunities to supplement organic growth prospects. It is particularly focused on Europe when it comes to M&A activities, believing there are a number of potential opportunities in the region.

Looking ahead, Victoria is expected to post a rise in its bottom line of 22% in the current year, followed by further growth of 10% next year. Despite this upbeat growth outlook, it trades on a price-to-earnings growth (PEG) ratio of just 0.9 at the present time. This suggests that there could be a wide margin of safety on offer, as well as the potential for a significant upward rerating over the medium term.

Victoria’s international focus may benefit future performance. UK interest rates are expected to remain low in future years, and when coupled with the uncertainty surrounding Brexit leading to an even weaker pound, this may create a positive currency translation adjustment and boost its profitability and share price yet further.

Growth potential

Also offering upbeat growth prospects at a fair price is financial services company Old Mutual (LSE: OML). It is currently going through a major restructuring which will see it split into four smaller units. This could lead to greater efficiencies in the long run, as well as a higher premium when it comes to stock market valuations.

Looking ahead, the overall group is expected to post a rise in its bottom line of 9% this year, followed by further growth of 7% next year. This is ahead of the FTSE 100’s forecast growth rate during the same time period. Despite this, Old Mutual trades on a PEG ratio of just 1.4 at present, which suggests it could enjoy further share price growth after the 10% rise of the last month.

As well as its growth and value potential, the company has a dividend yield of 3.5% from a payout which is covered three times by profit. This suggests that future dividend growth could be high, which may act as a further catalyst on investor sentiment in the long term.

The post 2 under-the-radar growth stocks I’d buy today appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Old Mutual. 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.

Needless to say, I don’t share this view. I believe market sentiment, herd behaviour by fund managers and the impact of short-term news mean that bargains can still be found. Today I’d like to look at two stocks I believe could offer hidden value for shrewd investors.

A break-up bonus

Shares of insurance firm Old Mutual (LSE: OML) fell by 2% on Friday morning, after the group said that adjusted pre-tax operating profit rose by 37% to £969m during the period. Even a 32% increase in the interim dividend wasn’t enough to perk up the share price. So what’s happening?

This impressive increase in profit was partly the result of cash received from the disposal of the group’s Old Mutual Asset Management division. This is part of a process of ‘managed separation’ which should see this conglomerate split up into four parts over the next couple of years.

The firm’s management expects to create value for shareholders by “unlocking the conglomerate discount”. What this means is simply that groups of businesses are often valued at less than the same businesses would be individually.

Old Mutual’s valuation certainly seems pretty modest to me. The stock trades at a 10% discount to the firm’s adjusted net asset value of 220p per share. A forecast P/E of 9.4 and prospective yield of 3.5% also seem quite cheap.

Of course, the risk for private investors is that it’s difficult for us to be sure of the value that will be created by the separation process. Shareholder returns may be less than expected.

However, management focus on shareholder value and a modest valuation mean that I’d be comfortable buying this stock at current levels.

The next blockbuster?

The term blockbuster is often used in the pharmaceutical industry. But it can apply elsewhere. Listed private equity firm 3i Group (LSE: III) has had a few blockbuster investments of its own.

The most recent was European budget retailer Action. 3i originally invested £107m in this group in 2011. The company has since received cash returns of £526m from Action and says that its stake in the firm is now worth £1,835m.

Blockbuster investments of this kind don’t come along every day. The big risk for 3i and its investors is that the group’s management will be tempted to overpay for new opportunities.

However, Simon Borrows, 3i’s chief executive, has shown great discipline with new investments in recent years. Assets sales have also been well-timed at largely profitable. This combination has seen the group’s share price rise by 150% in three years.

One risk is that the firm’s last-reported net asset value was just 604p per share. This means that the current share price of 940p prices the stock at a heady 1.6 times book value. The forecast dividend yield of 2.8% isn’t especially generous either.

The market has already priced in quite a bit of growth at 3i. This well-run company may continue to outperform the market, but I’m not sure there’s much hidden value left.

The post There could be hidden value in these FTSE 100 stocks appeared first on The Twelfth Magpie.

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Roland Head has no position in any 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.

For example, the Fidelity Global Technology offers exposure to the US tech sector, which has been on a roll in recent years. The fund’s largest holding is Alphabet, the parent company of search engine giant Google. The second largest holding is Apple, and the third is Intel. Together these three holdings make up nearly 20% of assets under management.

Actively managed investment funds have faced a lot of scrutiny over the past few years as many don’t offer value for money and have underperformed the wider market. The Fidelity Technology fund does not fall into this bracket. Over the past 4.3 years, the fund has returned 23.5% per annum and only charges an annual management fee of 0.8%, making it one of the cheapest growth funds around.

Growth and income 

If it’s income you’re after, the Invesco Perpetual High Income could be a great pick for your portfolio. The fund offers exposure to some of the UK’s best dividend stocks such as British American Tobacco and BP. The great thing about owning a fund like this is that the diversification means your portfolio is unlikely to suffer significantly if one or more of the holdings is forced to cut its dividend payout. With 20+ holdings, Invesco Perpetual offers a diversified income portfolio that would be extremely costly to replicate for yourself. 

The fund charges of 0.9% per annum in management fees and currently supports a dividend yield of 3.1%. Over the past five years, the fund has produced a total return of approximately 69%, with a relatively low level of volatility for investors. 

So while you may be able to buy stocks that support a higher dividend yield individually, Invesco Perpetual offers a well diversified, low volatility portfolio with a relatively attractive dividend yield that requires no effort on your part.

Small-cap champion 

Small-cap stocks are known for their ability to generate outsized returns for investors, but unfortunately, they are also much riskier than their blue-chip peers. That’s why it pays to buy a fund that invests in small-caps for you, so you can pocket the gains but don’t have to spend years becoming an expert on the subject. The Old Mutual UK Smaller Companies Focus fund is a perfect example. 

Over the past five years, the fund has smashed its benchmark, returning 237%. No dividend is offered, but you don’t need income when the managers are able to generate such impressive capital gains. The management fee charged is a modest 0.88% per annum. 

If you’re looking for a fund that offers exposure to fast-growing small-caps, with a record of outperformance at a low price, Old Mutual UK Smaller companies ticks all the boxes.

The post 3 top income and growth funds to help you achieve financial independence appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has recommended BP and Intel. 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.

Changing business

Tesco is making huge changes to its business model. While a few years ago it was focused on becoming a conglomerate with assets in a wide range of countries, today it is returning to its roots as a UK-focused grocer. This should equate to greater efficiency and a focus on improving the company’s competitive advantage. It should also allow more capital to flow into developing its core offering.

As well as improving its efficiency, the acquisitions and disposals programme put in place may lead to an improving balance sheet. The purchase of Booker could create synergies, while the sale of other assets is helping to reduce the company’s overall leverage. This may make higher dividends more likely in future, since lower debt may mean lower risk.

Growth potential

The changes being made by Tesco are due to result in significant earnings growth over the medium term. For example, in the current year it is expected to record a rise in its earnings of 40%, followed by additional growth of 30% next year. Not only could this act as a positive catalyst on the company’s share price, it may also lead to a rapidly-rising dividend.

In the current financial year, the company is due to reinstate a dividend so that it yields 1.8%. While unimpressive, it is forecast to raise dividends per share by 77% in the following year so that it yields 3.2%. However, even a 77% rise in dividends will leave Tesco with a forecast payout ratio of just 46%. This suggests that it could afford to pay out a higher proportion of profit as a dividend, which could mean dividend growth is higher than earnings growth over the medium term.

Competition

Of course, investors seeking a high yield today may wish to look elsewhere in the FTSE 100. One stock which offers a strong income outlook is diversified financial services business Old Mutual (LSE: OML). It currently yields 5.2% from a dividend which represents 46% of earnings. Therefore, there is also scope for the company to increase shareholder payouts at a faster pace than profit growth in future years.

In addition, Old Mutual is expected to grow its bottom line by 16% this year. This puts its shares on a price-to-earnings growth (PEG) ratio of 0.5, which mirrors that of Tesco. As such, both stocks seem to be worth buying at the present time. For more patient investors, Tesco could be the superior option, and in time it may become one of the FTSE 100’s very best income plays.

The post Will Tesco plc become the best dividend stock in the FTSE 100? appeared first on The Twelfth Magpie.

More reading

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Peter Stephens owns shares of Old Mutual and Tesco. The Motley Fool UK has recommended Booker. 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.