With interest rates still at historic lows and likely to remain so over the medium term, dividends are set to remain critical to many UK investors. Certainly, there is scope for a small rise in interest rates. But the reality is that it is likely to be many years before the returns on a range of assets including cash and bonds move to more normal levels. As such, buying dividend stocks could prove to be a sound strategy. Here are two companies which could be worth a closer look.
Growth potential
Reporting on Tuesday was energy services company Wood Group (LSE: WG). While its performance in the first half of the current year was down on the same period from the prior year, this was reflective of difficult market conditions across its operations. In particular, the North Sea market remains challenging, although the company’s full-year outlook is unchanged. It expects to deliver stronger performance in the second half of the year, while its acquisition of Amec Foster Wheeler has the potential to be a positive catalyst on its performance.
While buying an oil and gas-focused company may not seem logical from an income perspective due to the uncertain outlook for the industry, Wood Group offers strong dividend prospects. It currently yields 4.6% from a dividend which is covered 1.6 times by profit. This suggests that further dividend growth could be ahead.
Since its bottom line is forecast to rise by 19% next year, it also offers a low valuation and a wide margin of safety. For example, the stock trades on a price-to-earnings growth (PEG) ratio of just 0.6, which suggests that it could deliver high capital growth as well as a strong income return.
A changing business
Also offering a strong income outlook is insurance company Aviva (LSE: AV). It has made wholesale changes to its business model in recent years, and they have contributed to a significant uplift in its financial performance. For example, it was lossmaking in 2012, but is due to deliver a pre-tax profit of almost £2.5bn in the current year. Next year, it is expected to increase its bottom line by 7%, which puts it on a PEG ratio of only 1.4.
As well as growth and value prospects, Aviva currently yields around 4.9%. Dividends are covered twice by profit and this means there is sufficient capital available for reinvestment. While much of the asset disposals and changes to its business have now been completed, there is still scope for further improvements in its efficiency and financial strength. They could act as positive catalysts on its investment performance and lead to improved investor sentiment over the medium term.
With Brexit unlikely to severely affect Aviva’s business performance, its outlook is positive. With high return potential and a solid business model, it could prove to be a strong income stock in the long run.
