Top 22 income stocks for 2020

There are still plenty of generous dividend payers around, according to these City analysts.

Income seekers have been urged to take a closer look at Persimmon (LSE:PSN), Provident Financial (LSE:PFG) and N Brown (LSE:BWNG) after a leading City broker named its 22 most-fancied dividend stocks for 2020.

Peel Hunt's income selection also features Bloomsbury Publishing (LSE:BMY), Cineworld (LSE:CINE), Ibstock (LSE:IBST) and Direct Line (LSE:DLG), alongside three stocks from the real estate sector.

Investors who followed the firm's income tips last year would have seen an average total return of 36%, compared with 12% for the FTSE 100 index and 14% for the FTSE All Share. 

Peel Hunt said 21 of its 25 picks outperformed the market in 2019, led by Dunelm (LSE:DNLM) and Rank (LSE:RNK) after the pair more than doubled total returns. Greene King and Manx Telecom were also taken over in the year.

Today's latest crop of income stocks offer an average dividend yield of 5.3% for 2020, rising to 5.5% the following year. They range in market capitalisation from Persimmon at £8.8 billion to the £221 million-valued energy company Pharos (LSE:PHAR), whose forecast dividend yield of 10.3% is the highest on the list.

Source: TradingView Past performance is not a guide to future performance

While some of the stocks have been picked for their yield and supporting dividend cover, others are on the list because of the dividend growth expected over the next few years.

B&M European Value Retail (LSE:BME) is perhaps one of the more surprising selections, given that its forward yield below 3% means it is considered a growth stock rather than an income play.

Peel Hunt says the discount retailer's inclusion reflects hopes for a hearty special dividend once the sale and leaseback of its distribution centre is completed. This may well be followed by further specials with a “degree of regularity in the future”.

• 35 best growth stock ideas for 2020
• Top value stocks for 2020

Explaining the broker's “buy” recommendation and 450p price target, Peel Hunt analyst Jonathan Pritchard said:

“We believe current trading is robust and with the range continuing to evolve and the property market firmly in B&M's favour, the prospects are good.”

Pritchard has also picked DFS Furniture (LSE:DFS) for Peel Hunt's list, with the sofa retailer's 5% yield looking attractive in the wake of the general election result.

He added:

“Political stalemate in recent years badly damaged big-ticket spending, so clarity on that front should bring the shoppers out: after all, the replacement cycle of a sofa cannot widen forever!”

Pritchard pointed out that DFS was highly cash generative and that growth in the dividend could be expected, even though the company still needs to rebuild earnings cover.

• Stockwatch: An all-time price low and 9.6% dividend yield

• 10 investment trusts for income investors

• Income hunters can find great funds on ii’s Super 60 recommended list of investments

The other retail stock on the list is online fashion business N Brown, which is also looking to rebuild fortunes after cutting its dividend by 50% to 7.1p in 2019 financial results.

With tax and customer-related compensation payments now out the way, Peel Hunt expects to see a return to free cash flow generation this year and overall cash generation from 2021. Despite rising by 48% since the beginning of October, the broker notes that shares still trade on price/earnings (PE) multiple of just 6.9x.

Analyst John Stevenson added: “In the short term, earnings remain supported by efficiency savings, giving management time to demonstrate the improved product proposition.

“While the recovery has been protracted, a 7x PE looks far too harsh an assessment and the 4.7% dividend yield remains well covered.”

The story is similar at Provident Financial (LSE:PFG), which has been trading on a relatively low multiple of 7x with a high dividend yield of 8% in 2020 rising to 9.4% in 2021.

The sub-prime lender, which has endured a few difficult years of trading, impressed Peel Hunt with its plans at a recent capital markets day. These include a move to expand its Vanquis bank business into unsecured personal loans and the potential for underlying growth in car finance.

Source: TradingView Past performance is not a guide to future performance

Peel Hunt said: “Although there was little that could be described as transformational, the plans for each business were well thought out and built on existing core strengths.

“The overall objective is to build a broader bank for the underserved, which is likely to see the constituent parts work more closely over time.”

Persimmon is one of six stocks to keep its place on Peel Hunt's list from last year — the others being Anglo Pacific (LSE:APF), Central Asia Metals (LSE:CAML), Ibstock (LSE:IBST), Renewi (LSE:RWI) and Warehouse REIT (LSE:WHR).

The broker said the housebuilder's forecast dividend yield was 9% for both 2020 and 2021, supported by a cash balance of £900 million and pre-tax profit of over £1 billion.

Despite the group investing more into customer service and build quality following well-publicised issues last year, this is unlikely to dent cash flow or threaten the dividend.

Peel Hunt expects Persimmon to pay a 235p dividend in both 2020 and 2021, equivalent to about £740 million a year. The current average yield for the housebuilding sector is 6.3%, with Persimmon second only to the 9.3% at Taylor Wimpey (LSE:TW.).