2 top income stocks to help you to financial independence

Dividends

With inflation edging towards 3%, and possibly set to rise even higher as the Brexit-driven fall in the pound continues to bite, seeking better-than-average dividends and ones with strong progressive futures is an increasingly attractive strategy for achieving long-term wealth.

Cash from cash

Specialist currency manager Record (LSE: REC) is offering both at the moment, with last year’s 4.3% dividend yield set to rise to 5.9% and then 6.2% over the next two years. And those uplifts are way ahead of inflation — a 32.5% hike for the year to March 2018, followed by a further 5.7% boost the year after.

Friday’s first-quarter update lent confidence to those expectations too, with the firm’s assets under management equivalents up 2.9% to $59.9bn (from $58.2bn on 31 March). In sterling terms that translated to a 1% fall from £46.6bn to £46.1bn, but that still seems fair considering the erratic nature of the pound.

Inflows

Chief executive James Wood-Collins told us of inflows of $0.6bn from existing clients during the quarter, and spoke of the uncertainty that continues to impact the world’s currency markets — and that’s what makes people edgy and require the services of firms like Record.

That attractive dividend policy is only one way in which Record has been returning cash to shareholders, with a £10m tender offer to buy up shares at a premium having taken place this month — and it was oversubscribed.

The shares are currently at 43.75p, having gained 77% over the past 12 months, and that puts them on a forward P/E of 13.2 on 2018 forecasts, dropping to 12.6 for 2019. 

That looks cheap to me, and if these mooted dividends materialise, I can see investor sentiment strengthening and demand for the shares growing — so there could be a nice growth opportunity here too.

Strongly progressive

By comparison, the 2.3% dividend yield expected from Homeserve (LSE: HSV) this year might not look that tempting, but its key attraction is its inflation-busting rises. The 15.3p paid out for the year ended March 2017 represented a 20% leap from the year before, and analysts are expecting rises of 9.4% this year and 8.7% next.

The supplier of emergency plumbing and electricity services has said it “intends to adopt a progressive dividend policy and targets a dividend cover in the range 1.75 to two times over the medium term.” And with the past three years of EPS rises predicted to continue with growth of 14% and 11% over the next two years, I see the dividend as reliable.

Friday’s update spoke of “continued strong growth in the current financial year,” with seasonal business being weighted more towards the second half.

North American performance looks good, with 2.5m new households added, partly due to 24 new partnership deals. At the same time, UK and European business looks to be on target.

Growth too

Acquisition and expansion into the home repairs and improvements market is part of Homeserve’s strategy, and I see that as a rather exciting new market — it could potentially be a lot bigger than today’s emergency services business.

And that’s what makes Homeserve even better than a just progressive dividend candidate — we’re looking at a long-term growth share too. Granted, the next two years’ PEG ratios aren’t superbly attractive at 1.6 and 1.9, but I’d say they’re plenty good enough for a nice growth/income combination.

P/E multiples of a bit over 20 might look high, but I can see those coming down significantly over the next few years.

Financial independence

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More reading

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Homeserve. 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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