Dividends are by far the easiest way to generate passive income, when re-invested over a long period of time they will compound to give you more income. If you want to invest in the UK market there are three dividend stocks that you should look into.
Legal and General (LGEN)
If you want to look for a giant in the insurance, investing and pensions industry then look no further. Legal and General have proved themselves over the last 12 months to be both diversified and reliable for income investors. In an era of low interest rates they are still able to generate a 17.3% return on equity, something a bank could only dream of. This is down year on year from 20.4% in 2019, but still a good outcome considering 2020 was a challenging year.
LGEN are able to have strong cash generation due to its diversified portfolio of ‘real’ assets, as opposed to government bonds. They have been able to invest in housing, commercial property and renewable energy which, requiring large upfront capital, have provided steady long term income. LGEN is able to do this due to the fact they have over £1 trillion in assets under management.
In 2020 pre-tax profit fell 12% to £1,607m, however this is mostly due to valuation changes of assets not a cash income. Cash from operations only fell by 3.6% to £1,539m. This all supports a dividend of 17.3p per share, giving a yield of 6.2%, which remains unchanged from last year.
Tritax Big Box (BBOX)
This is a company that has been well placed to take advantage of the boom in e-commerce which is set to continue well after this pandemic. It has seen a 100% rise in share price year on year. Tritax rents out warehouses covering 500,000 sq feet of space or more, something that is reasonably rate. These warehouses are ideally situated near to major transport links such as motorways, which along with their logistics expertise have made them attractive to customers such as Amazon and Ocado.
Due to the desirable nature of their assets they are able to impose attractive terms to their property such as upwards only rent reviews. In 2020 they collected 99.4% of rents which is a very good outcome for a REIT, outstanding arrears are expected to be recouped by the end of the current financial year. REITs are required to payout at least 90% of post tax profits which Tritax does with a 6.4p per share dividend, a payout ratio of 93%.
In 2020 they had a 20% increase in operating profits to £147.5m, this has been fueled by an increase in rental income of £161.5m or 11.9%. It is worth noting, however, that the dividend was reduced from 6.85p in 2019 but this is probably Tritax being cautious of the impact the pandemic could cause. They have increased the 4th quarter dividend back to 2019 levels of 1.71p as the outlook has improved.
Diageo is the company behind iconic alcohol bands such as Johnny Walker, Smirnoff and Guinness. The pandemic has been a mixed blessing for this company, while hospitality sales have decreased they have benefited from drinking at home. Additionally customers are increasingly willing to pay more for premium products that Diageo are acquiring more of every year.
Sales in its largest market, North America, increased 12.3% in the last six months of 2020. Diageo recorded total sales of £6.9bn in 2020 which is down by 4.5%, with profits down by 3.4%. That said, cash from operating activities increased by £700m to £2bn; free cash flow also increased by £800m to £1.8bn.
While Diageo has faced challenges during the pandemic with hospitality being mostly closed for the last 12 months, they could prove to be a good reopening play to be held long term. This is very much reinforced by the fact that Diageo was able to increase their interim dividend by 2% to 27.96p per share giving a current yield of 2.3%.
None of the content in this article should be considered financial advice, I am not a financial adviser and you should always do your own research prior to investing. These are my opinions only.