If you don’t know already, I am a dividend investor; this means I buy good quality stocks with a view to hold them long term and collect any dividends they pay out. While the plan is to one day have these dividends supplement my everyday expenses, currently they are reinvested.
Reinvesting your dividends is really important and will supercharge your dividend growth portfolio over time. If a company’s share price is £10 and they pay out £1 per share, if you reinvested that dividend you would have 1.1 shares total. The next time that stock pays out a dividend you would then receive £1.10 and be able to buy a further 0.11 shares of that company.
This reinvestment of dividends over time is known as the dividend snowball effect. When done over a long period of time the amount of earned dividends will increase exponentially.
Legal and General
The first stock I am currently buying is Legal and General (£LGEN), currently up 1.96% year to date, it is down 10.3% from its April high. I believe this presents a really good buying opportunity. LGEN is an insurance giant that provide low cost funds for ordinary people to invest in, typically through ISAs or retirement accounts. As well as its business in the UK it also has operations in the US, France, the Netherlands and Germany.
Over the last five years LGEN has consistently grown its operating profit, the only exception being 2020 which was still higher than in 2016. LGEN pays a dividend of 17.57p per share, massive 6.6% yield.
Usually a high yield would trigger alarm bells but not in this instance. With an earnings per share of 19.84p in 2020 this represents a EPS payout ratio of 88%. While this sounds high you need to remember that 2020 was an unusual year, so it might be worth looking at 2019. When you look at 2019 you see a dividend of 17.57p per share with an EPS of 28.66 which gives you a EPS payout ratio of 61%.
With those earnings figures I am confident in the safety of such a high dividend yield making this stock even more attractive. Given its recent share price dip, I am looking to buy more.
Tritax Big Box
The next stock I am buying is Tritax Big Box (£BBOX). This a real estate investment trust (REIT) that rents out large warehouses located in prime logistical locations along major transport routes in the UK. With 59 investment assets worth £4.41 billion, and another 30.2 million sq ft of development in the pipeline, this is a growing business for the future of retail.
BBOX has been extremely well placed to deal with the pandemic as it services key retail clients such as Amazon, DHL and Tesco. With an acceleration in the move towards online retail over the high street, BBOX can only benefit from this change.
Over the past 5 years its total profits have grown massively from £91.9 million in 2016 to £449.4 million in 2020. Last year BBOX paid out £109.2m in dividends from a free cash flow of £449.4 million giving a pay out ratio from free cash flow of 24%. This is an extremely healthy figure showing a very safe dividend and an ability to invest in more assets.
Year to date the BBOX share price is up 23%, despite this I believe there is still great value to be gained to buying more shares. Therefore, I will be buying more.
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.