Top UK stocks with healthy cash flows and dividend yields

Regent Street and red double-decker bus, London, UK — (Image credit: Getty Images)

When looking for stocks to buy we concentrate on how much cash they make and how much we’re paying to put them in our portfolio. We appraise cash flow rather than accounting profit because it represents a return more secure than promises by customers to pay later. It is also harder for companies to manipulate.

Businesses with healthy cash flow have the flexibility to repay their debts when they come due, reinvest in their businesses to create future profits, and pay dividends to shareholders. And as for valuation, the price you pay is one of the main determinants of your long-term returns.

While the past decade has not been kind to the UK stock market, we remain enthused about its prospects. Valuations are highly attractive, especially relative to other markets, and the country is still home to many high-quality businesses capable of producing good returns and rising dividends. The following are three companies we own that fit our key criteria and offer attractive and growing dividends.

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Three UK stocks to energise your portfolio

National Grid (LSE: NG) was once regarded as a dull but worthy high-yielder. Now the owner of energy networks in the UK and north-eastern US is also something of a growth stock. The company has announced an extraordinary £60 billion investment plan to upgrade its infrastructure to cope with the power system’s shift from fossil fuels to renewable generation.

With thousands of miles of both offshore and onshore cables to be laid in the UK alone, the challenge is great. However, the prize of set, regulated returns on an asset base growing at 10% each year is highly attractive. Importantly, with a prospective dividend yield of 4.8%, rising with inflation, income investors haven’t been forgotten as the UK rushes towards “clean power by 2030”.

UK food retail is another area that rarely sets pulses racing, but we believe that the competitive position of the UK’s biggest supermarket, Tesco (LSE: TSCO), is better than it has been for some time. Rivals Asda and Wm Morrison, saddled with debt by their private equity owners, have been bleeding market share in recent years.

Similarly, the once formidable German discounters, Aldi and Lidl, are now more focused on profitability than gaining market share and opening new stores.

In addition, with over 23 million UK households (82%) in possession of a Tesco Clubcard, the company has incredible insight into consumer spending habits. In time, this should offer a new avenue for improving profit margins. While the surprise increase in employment costs announced in the Budget is clearly unhelpful for bricks-and-mortar retailers, we don’t think it will destabilise the firm’s strong fundamentals.

Assura (LSE: AGR), which owns and develops GP surgeries and private hospitals, is on the front line when it comes to delivering the much-needed upgrade to the UK’s healthcare estate. The Darzi Report into the state of the NHS noted that “the primary care estate is plainly not fit for purpose”, with 20% of GP surgeries predating the NHS itself, and too little of the budget being spent in the community. These findings play neatly into Assura’s plan to develop modern, purpose-built, community-based, primary-care facilities.

Recognising the problem isn’t the same as delivering the solution. More political willpower and firepower may be needed. However, demographic headwinds mean the challenges confronting the NHS are unlikely to diminish.

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