When building a strong portfolio of dividend stocks it is important to consider not only the raw yield, but to look at those stocks that can deliver sustained dividend increases over a period of time. We have looked at the end of 2014 fiscal year / first half of 2015 and picked 5 companies for your consideration.
We look particularly at dividend cover and forecast growth in profitability to make these selections. This is by no means an exhaustive list. We start with a ‘first glance’ look and then move on to whittle down our initial selection of 14 down to 5. Lets look at the fundamentals of these 14 excellent performers.
32 Red
Increased its final dividend by 40%, has net cash and has started the new year extremely well. With this P/E and yield they make the last 5.
Forward P/E 11.7x
CADI 5+
3 dividend optimizer yield 6.97%
FDI 25%
Cover 2.1x
ITV
Another fabulous year, our dividend of the week from January 2013 goes from strength to strength. They keep increasing the dividend strongly and are paying regular specials as well. We highlighted them in January 2013 as a sleeping giant and the numbers look as though they can continue to improve.
Forward P/E 16.4x
CADI 4
3 dividend optimizer yield 3.15%
FDI 21.3%
Cover 2.7x
Dignity
Are Mr. 10%. They will keep on increasing by 10% for the foreseeable future with their very strong dividend cover. A good business to be in given the demographics, but the yield is a little miserly. It is possible that they could have a sudden increase in the payout ratio or even a special, but there is no evidence to suggest that they will do either. Your 10% a year looks pretty safe though.
Forward P/E 19.6X
CADI 5+
3 dividend optimizer yield 1.53%
FDI 10%
Cover 4.6x
Rightmove
Rightmove’s recent track record of dividend increases is tremendous with more forecast to come. It has good cover, but the P/E is high and the yield is on the low side.
Forward P/E 26.1x
CADI 5+
3 dividend optimizer yield 1.86%
FDI 20%
Cover 2.9x
Howden Joinery
Howden has been increasing its dividends very rapidly in recent years and has been improving in every measure. It also had net cash of £217.7mat the year end and has pledged to buy back £70m of its shares. Makes the final 5.
Forward P/E 18.3x
CADI 4
3 dividend optimizer yield 3.1%
FDI 20.2%
Cover 2.6x
Unite
Unite has also been increasing its dividend rapidly, but with the payout ratio now at 65%, the scope for very big increases has reduced a little. There is still growth in the pipeline, but with the very high PE and the cover below 2, it does not make our final 5.
Forward P/E 27.1x
CADI 4
3 dividend optimizer yield 3.51%
FDI 16.1%
Cover 1.6x
Dunelm
Dunelm reminds me of Next in that it is highly cash generative and is returning cash to shareholders at a rapid rate as it paid its second special dividend in the past 3 years this month. It has not gone down the share buyback route that is favoured by Next to boost EPS, but it has not needed to. EPS in the first half of 2015 was up 14.3% and it has net cash of £58.7m (most of which will be spent on the special dividend which has already gone ex via a C share scheme)
Forward P/E 17.6x
CADI 5+
3 dividend optimizer yield 3.15%
FDI 17.5%
Cover `2.2x
ARM
ARM is a massive UK technology success, but for us it is looking too expensive, but there is no doubting its ability to continue growing its dividend with cover at 3.5x.
Forward P/E 38.4x
CADI 5+
3 dividend optimizer yield 1%
FDI 18.5%
Cover 3.5x
Telecity
Telecity has got good dividend cover and has promised to raise its dividend to 50% of EPS over the next three years. With EPS already at nearly 40p and expected to rise to nearly 47p by 2016, the dividend should rise to around 23p over the next 3 years from the current 13.5p. That is roughly 20% compound growth. Makes the final 5.
Forward P/E 21.8x
CADI 3
3 dividend optimizer yield 2.71%
FDI 16.3%
Cover 2.5x
Photo-Me
We like Photo-me and we highlighted its attractions way back in November 2012. As it is already in our small cap picks for 2015, we will not select it here. The growth prospects and yield remain enticing.
Forward P/E 22.3x
CADI 4
3 dividend optimizer yield 5.23%
FDI 30%
Cover 1.6x
Big Yellow
Big Yellow has a pretty impressive recent record and has already increased its 2015 interim dividend by 30%. The forward yield is not bad, but the cover leaves little scope for anything other than dividend increases driven purely by earning growth.
Forward P/E 23.4x
CADI 4
3 dividend optimizer yield 4.28%
FDI 29.3%
Cover 1.5x
Easyjet
Our views on Easyjet are well documented and we do not need to repeat them and for that reason they do not make the final cut.
Forward P/E 12.9x
CADI 4
3 dividend optimizer yield 3.58%
FDI 15%
Cover 2.5x
Pace
We recently researched Pace and they have not let us down since then producing a dividend increase of 32.4% in 2014. With very high cover, there should be more to come. Because we looked at them so recently, they do not make the final cut.
Forward P/E 9.5x
CADI 5+
3 dividend optimizer yield 1.9%
FDI 15%
Cover 8.7x
Booker
Booker is an excellent company with a very good dividend track record since 2008. The forward yield is decent but the PE is high.
Forward P/E 25.1x
CADI 5+
3 dividend optimizer yield 3.87%
FDI 16.3%
Cover 1.9
We are going to immediately eliminate 3 stocks that we have recommended to members in the recent past, although we still consider them to be great dividend stocks namely Pace, Easyjet, and Photo-me.
Looking at the other companies and the selection criteria, we will eliminate, rightly or wrongly Unite for its high P/E and relatively poor dividend cover; Also Booker and Big Yellow for the same reasons. We also eliminate ARM and Rightmove for their low yields.
This leaves us with 32Red, Howden Joinery, Telecity, ITV and we are going to go for Dignity for their very predictable dividend increases and the outside possibility of a payout hike or a special dividend.
