Many investors seeking financial services stocks may choose banks such as Westpac Banking Corp (ASX: WBA) and Commonwealth Bank of Australia (ASX: CBA). However, AMP Limited (ASX: AMP) has risen by 13% in the last six months. Here’s why that could continue.

Dividend appeal

The reduction in interest rates to 1.5% makes higher yielding stocks such as AMP more attractive. It yields 4.9% versus 4.3% for the ASX and is forecast to increase dividends per share by 6.5% per annum during the next two fiscal years. A key reason for this is a planned increase in AMP’s payout ratio from financial year 2015’s 74%. AMP plans to pay out as much as 90% of profit as a dividend and this reflects the confidence it has in its financial outlook.

For example, its regulatory capital funds in excess of the minimum requirement increased by 28% in FY 2015 to $2,542 million. This provides AMP with a significant cash buffer in case of adverse market conditions. Further, its cost to income ratio improved by 1% to 43.8% due in part to tight cost controls as well as a 6% rise in assets under management to $226 billion. These figures provide evidence of AMP’s improved financial standing, which highlights the potential for dividend growth beyond the next two years.

Strategy

AMP is also focused on customer service improvements which could improve customer loyalty and drive margins higher. For example, it has invested heavily in digital technology such as its online system, My AMP, which provides ease of use for customers as well as cross selling opportunities. It has also invested in its financial advisor network, including in more face-to-face advice. In my view, this builds greater trust with customers and the network generated 24% of AMP’s mortgages in FY 2015 as a result.

AMP has slashed costs through its three-year business efficiency programme. It has invested $320 million in a cost saving programme to achieve $200 million in pre-tax recurring run rate cost savings by the end of FY 2016. Measures such as this contributed to a rise in return on equity (ROE) of 50 basis points to 13.2% in FY 2015.

International opportunities

AMP’s exposure to China offers growth opportunities. Average incomes in China are forecast to rise from $12,400 per annum in 2016 to over $18,000 per annum by 2020. The country’s retirement age is expected to stay at 60 for men and 50 for women between now and 2020, which indicates that the sale of pensions and other savings products could rise. Similarly, sales of consumer discretionary products (including financial products) are forecast to increase by 7% per annum over the same timeframe.

AMP is well placed to capitalise on this growth through its joint ventures with China Life. Combined with its sound strategy and dividend outlook, this means that AMP’s shares could continue to rise.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget BHP and Woolworths. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Robert Stephens has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.