Few firms in the FTSE 100 have such a critical job as the London Stock Exchange Group (LSE: LSE). This business is one of the most important financial companies in the world and is a leader in the provision of financial services, so much so that many other countries rely on the LSE to manage the plumbing of their financial markets.
For example, LSE is the majority owner of clearing house LCH Clearnet, which provides the tedious but essential service of settling trades (among other things).
Clearing houses are a vital part of the financial system because they act as a trusted intermediary between traders around the world. Demand for this business is only growing. Last year, despite Brexit uncertainty, LCH Clearnet processed $1.1trn of complex derivative trades making the LSE’s clearing division by far the most significant player in Europe. And it’s a vital part of the European financial system.
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Clearing isn’t only part of LSE’s sprawling business model. The group also provides technology and services for other exchanges such as the Norwegian Stock Exchange, which has used LSE’s tech to manage trading since 2009.
Market leader
LSE’s leading market position indicates to me that this company isn’t going anywhere anytime soon. This leads me to conclude that the business will still be producing returns for investors 50 years from now, making it the perfect buy-and-forget income play.
Right now, the stock supports a dividend yield of 1.6%. Although that might not seem like much, the distribution has risen 100% over the past six years, and analysts are predicting double-digit payout growth per annum for the foreseeable future.
Essential business
If you’re looking for a higher level of income, however, Dignity (LSE: DTY) could be a better buy.
This company has run into some problems over the past 12 months and is now being forced to restructure its business model. As a result of these changes, City analysts are expecting earnings per share to fall by around 50% over the next two years. Still, as the UK’s largest funeral provider, Dignity has plenty of flexibility to adapt to the new environment.
Unlike so many other businesses, which have to encourage customers to buy their product or service, death isn’t something we can avoid, which means Dignity will always have a steady stream of customers, no matter what happens.
With this almost guaranteed revenue stream, the company can take the time to re-focus the business and rebuild its reputation. As the process continues, it might be worth tagging along for the ride. Indeed, at current levels, the shares are hardly expensive, trading at a forward P/E of 9.3 and offering a prospective dividend yield of 3.4%. As the distribution is covered around three times by earnings per share, even after factoring in a 50% decline in profits over the next two years, it looks as if the dividend is secure for the time being.
Although Dignity’s outlook isn’t as bright as that of the LSE, if you’re looking for a long-term income, I certainly think it is worth considering this company for your portfolio.
