Im not going to pretend that well-known fund manager Neil Woodfords share-picking prowess has been celebrated much by anyone lately. Thats because his funds havent been doing well over past two or three years, and many of his share picks have gone down rather than up. However, I admire the dividend-led strategy that enabled him to outperform the market in the past, and I think its worth revisiting some of his picks that are paying big dividends right now.
Great shares for a diversified portfolio
I wouldnt bet the farm on these two, but as part of a diversified portfolio of shares, I think Neil Woodfords top holding by value, smoking products supplier Imperial Brands (LSE: IMB), and construction and development firm Watkin Jones (LSE: WJG), are worth digging into. Imperial Brands projected dividend yield for the trading year to September 2019 is running above 8%, and City analysts expect Watkin Jones to pay a dividend yielding close to 4% for the year to September 2019. So, at first glance, both companies are good candidates for a dividend-first investing strategy.
Watkin Jones develops and constructs multi-occupancy propertiesfocusing on student accommodation and build-to-rent sectors. Its a good business and the firm has a record of growing revenue, normalised earnings, operating cash flow, and the dividend. City analysts following the firm expect further annual advances in those measures over the next two years or so. Meanwhile, earnings cover the dividend payment more than twice, and theres decent support for earnings from operating cash flow. In October, the firm said in a trading update that it has a strongdevelopment pipeline that provides excellentfuture earnings and cash flow visibility.
Despite the macroeconomic headwinds blowing from Brexit, and the general nervousness in stock markets that weve been seeing, theres no sign that Watkin Jones is suffering any weakness in its operations, and the outlook is robust. I think the firm could be a great example of Neil Woodfords current-declared strategy of buying out-of-favour UK-facing cyclical firms because, to him, they look undervalued.
No sign of stalling operations
Imperial Tobaccos trend of growing earnings, cash flow and dividends shows no sign of stalling, despite a collapse in the share price since 2016. City analysts predict solid progress over the next couple of years, but the valuation rating has plummeted. Has the firm lost its defensive credentials, then? I dont think so, but investors are worried about something. Perhaps its the unpredictability of the regulatory environmentfor smoking-related products.
I think, in general, defensive firms suffer from their own type of cycle where they fall in and out of favour with investors. This means the valuations of such companies tend to be alternatively high and low as the cycle plays out. Right now, we seem to be in a low phase of the cycle, so I think it is worth picking up a few Imperial Tobacco shares to collect the fat dividend while waiting to see what happens next. In Novembers final results report, the firm said its well positioned to deliver strong, sustainable shareholder returns,and Im inclined to take a chance that the directors might be right in that assessment.
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