Why I’d buy these 2 top FTSE 100 dividend stocks

Offering yields of 6%, these FTSE 100 (INDEXFTSE: UKX) giants should prove to be long-term cash cows.

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In my youth I used to think of the FTSE 100 as being a collection of mature, stable and boring companies, good for steady but modest returns — and that to do better we needed to look for upcoming risers in the FTSE’s lower divisions, albeit with greater risk.

In truth it’s never really been like that, and the past decade has shown there’s plenty of drama and risk in London’s top index. It’s also clear that the FTSE 100 is home to some cracking investment returns if you look for them, and today I’m examining two that I reckon should provide excellent dividend income.

One of my favourites is Direct Line Insurance Group (LSE: DLG), and one of the things I like best is that its business is simple. The company offers motor and home insurance, requires relatively low capital expenditure, and is able to generate oodles of cash and hand over the bulk of it to its shareholders as dividends. 

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Special dividends

Direct Line pays a steady ordinary dividend and tops it up with a special dividend each year, and I like that model as it provides flexibility — paying everything as an ordinary dividend and cutting it when needed could be a disaster for sentiment.

In 2016, a total payout of 24.6p per share consisted of ordinary dividends of 14.6p plus a 10p special payment — that was lower than 2015’s total after EPS dropped by 20%, but it still offered a pretty magnificent overall yield of 6.9% on the year-end share price.

With EPS expected to bounce back with a 38% gain in 2017, forecasts for this year and next indicate dividends at similar cash levels, for yields of 6.6% and 7.1% respectively, on the current share price of 358p.

On top of that, Direct Line shares have more than doubled in value over the past five years, yet are still on modest forward P/E multiples of only around 12. Who wouldn’t want some of that?

A different kind of finance

My second comes in the shape of Provident Financial (LSE: PFG), which bills itself as “the leading non-standard lender in the UK“. It lends smaller sums at higher interest to poorer sections of the UK population. You might have moral qualms about that, but I’m looking at it purely from an investment standpoint here — your ethical approach is for you to decide.

There’s no question that Provident is performing very well, with EPS having soared by 77% from 100.4p in 2012 to 177.5p in 2016, while over the same period the dividend has been boosted by 74% from 2012’s 77.2p to last year’s 134.6p.

Great record

And over five years, the share price is up more than 150% to today’s 2,454p level — and that’s even after a dip on 21 June when the company issued a profit warning, telling us that profits from its consumer credit division should fall by 48% to £60m this year. It’s all down to the firm’s shift to a model of using employed customer experience managers rather than relying on self-employed agents, and that’s caused more upheaval than anticipated.

It’s disappointing, but it’s a one-off hit, and in the light of increased scrutiny of this segment of the lending business, it has to be a good long-term move.

On a forward P/E of 12 by 2018 and with a predicted dividend yield of 6.3%, the shares look like a bargain.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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.

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