While GlaxoSmithKline (LSE: GSK) has a relatively high yield of 5.5%, one concern among investors is its lack of forecast dividend growth. In fact, the health care company is expected to keep dividends at their current level over the next couple of financial years as it seeks to reinvest for future growth and to also increase its dividend coverage ratio.
Both of these uses of cash seem to be perfectly sound and should help to improve the company’s long-term profit growth prospects. However, it means that GlaxoSmithKline’s investors are unlikely to see their income growth beat inflation and if inflation spikes then this could be a worry.
However, beyond the next couple of years, GlaxoSmithKline looks set to grow shareholder payouts at a rapid rate. That’s at least partly because it has an excellent pipeline of new drugs, with around 40 treatments having the potential to improve the company’s bottom line. And with its consumer goods segment offering stability, GlaxoSmithKline seems to offer the perfect mix of dividend growth potential, stability and a high yield.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Fast dividend growth?
Of course, it’s not the only company with excellent income prospects. Diversified financial services companies Standard Life (LSE: SL) and Legal & General (LSE: LGEN) both have excellent yields and could grow dividends at a faster rate than even GlaxoSmithKline in the long run.
For example, Standard Life currently yields 5.9% and with dividends forecast to rise by over 7% next year, it could become increasingly popular among income-seeking investors. Furthermore, with dividends being covered 1.35 times by profit, there seems to be sufficient headroom to increase dividends at a faster rate than profit over the coming years. And with Standard Life forecast to grow its bottom line by 10% next year, there’s the potential for a double-digit increase in dividends over the medium term.
Similarly, Legal & General offers a high yield and upbeat dividend growth prospects. It currently yields 6.1% and with dividends being covered 1.4 times by profit, there’s scope for a rapid rise in shareholder payouts in future. Plus, with Legal & General having increased dividends per share by 120% over the last five years, it has an excellent track record when it comes to rewarding shareholders with higher dividends.
Glaxo resilience
However, while Standard Life and Legal & General are top-notch income stocks, GlaxoSmithKline appears to be more appealing. That’s because it has lower positive correlation with the wider economy than is the case for its index peers and this means that dividends are unlikely to come under the same degree of pressure in an economic downturn. In other words, dividends at GlaxoSmithKline may be more resilient in an uncertain economic climate. As such, it seems to be the pick of the three stocks from an income-seeking perspective.