Stocks with >1.2x coverage, 4% yield, solid balance sheet, good ROE, & a strong track record
Companies: BWY, IGG, KGF, MKS, PAY, PSN, PLUS
If you're still looking for solid dividend-paying stocks for your ISA/SIPP ahead of the 5 April deadline, then read on! Using our Dividend Kings screen as a starting point, and applying the criteria outlined by the Naked Fund Manager a few weeks back, we've put together a list of 6 companies across different sectors that we think offer a decent dividend yield and solid coverage from high-quality earnings.
How did we decide? Simple, the companies must have robust dividend coverage (>1.2x) with at least a 4% yield, a solid Balance Sheet to make sure it's sustainable, high return on equity, and a healthy track record of distributions.
We're taking the stocks from our Dividend Kings screen, which has the following criteria:
- Uk-listed companies
- Current Dividend Yield greater than 4%
- 5-year net Dividend Growth Rate greater than 4%
- Latest Dividend Coverage Ration greater than 1.2x
1) Marks & Spencer
What does the company do? Clothing retailer and supermarket
Market Cap: £5.23bn
Dividend Yield: 5.7% (2018: 5.6%, 2019: 5.8%)
Dividend Cover: 1.9x
Forward P/E: 9.4
The first stock in our list is high street retailer Marks and Spencer, whose dividend yields a massive 5.7% based on its current share price. M&S has been paying out a steady 17/18p dividend each year since 2012, but because of its share price fall from May 2016 onwards, (it lost more than 26%) shareholders can now capture this retail giant at a relatively decent discount.
However, investors should keep a close eye on M&S's competition, inflation, and the Brexit-induced uncertainty that it faces. The retailer paid out a £74.5m special dividend to investors last year, but such generosity is unlikely to be repeated due to uncertain market conditions.
Good news is that it recently beat forecasts for the first time in two years after facing significant competition from online-only-retailers, and if it can repeat that performance, a re-rating could be on the cards.
Financially, M&S is a very stable and cash generative business, but it has quite a high level of debt at £2.24bn, which widened by 2% in its latest update, and its free cash flow per shareholder fell 32.2% to £173.9m in 2016. EPS is also forecast to fall 17% over the next two years, which will squeeze the firm's dividend cover.
While M&S's current dividend yield is attractive; the firm doesn't have a great history of growing its dividend. It has raised its dividend for the past two years, with a 5-year div growth rate* of 1.92% and 10-year growth rate* of 1.89%. This is, for reference, not even in the top 50 dividend growth rates of the FTSE 100.
Having said that, it's 5-year average return on equity is 14%!
* The annualised percentage rate of growth that a stock's dividend undergoes over a period.
What does the company do? Owner of Screwfix, B&Q, and Castorama
Market Cap: £7.38bn
Dividend Yield: 3.2% (2018: 3.3%, 2019: 3.7%)
Dividend Cover: 2.3x
Forward P/E: 14.2
We've included the home improvement chain operator Kingfisher in our list of great dividend stocks even though it breaks our 4% rule on dividend yield. (Based on its current share price, it'll give investors a yield of 3.7% by 2019, close enough?)
The reason being is that Kingfisher is a steady and safe dividend payer with well-established valuable brands in Screwfix and B&Q. It's been yielding about 3% for the past five years but starting with their results out today, that looks to be on the increase, reaching a not too shabby 3.7% in two years’ time.
Financially, Kingfisher is sound, with its results out a few days ago showing that impressive performance from Screwfix helped it achieve 8.7% growth in sales during the year. Kingfisher is a rather profitable company margin wise, albeit with substantial overheads, and its EPS has been steady and increasing since 2012 (except for 2015), and it can cover its dividend 2.3 times, giving investors a sizable safety margin.
Kingfisher's dividend history is also impressive, with the Group growing it consecutively for eight years in a row. It also has an impressive 5-year div growth rate of 3.3%, but its 10-year growth rate is -0.24%. Its 5-year average return on equity is a more modest 8%.
3) IG Group
What does the company do? Trading Platform
Market Cap: £1.9bn
Dividend Yield: 5.9%
Dividend Cover: 1.4x
Forward P/E: 11.9
Financial trading giant IG Group might not be the considered the safest dividend stock for some investors, considering the ongoing FCA CFD crack-down, but on a forward P/E of 11.9x and at a yield of nearly 6%, this FTSE 250 giant seems like a bargain dividend to us here at Research Tree.
IG Group has been a reliable dividend payer over the past four years paying out 5.2%, 4%, 4.7%, 3.6%, and 3.9% between 2012 and 2016. The reason for the nearly 6% dividend this time round (and forecasted 6.3% up to 2019) is due to the share price collapse on 5 December after the FCA announced its investigation. That news caused a 33% drop in share price and has resulted in a great opportunity for dividend investors to pick up a reliable, financially solid, well-covered dividend at bargain prices.
This profit-making machine has assets of £791m, liabilities of just £128m, net cash flow from operations of £185m, and its most recent profit margin was 42%. It has dividend coverage of 1.4x, and don't forget that CEO Peter Hetherington picked up a sizeable chunk of shares (200,000) for 549.6p just after the firm's latest interims...
Looking at its track record, IG has achieved 5-year and 10-year dividend growth rates of 9.6% and 18% respectively... not bad. Also, it's 5-year average return on equity is 25%.
The big caveat is the risk associated with the ongoing consultation periods from various financial regulators. There is a chance that things could end up worse than expected. However, a big cut in earnings and cash generation is already priced in, and final decisions from regulators are expected from mid-way through the year.
P.S If the FCA regulatory "crack-down" is watered down in its final release, and IGG's forecasts don't change too much, you can expect to see IG rebound sharply, dramatically reducing the yield.
What does the company do? Payment processor
Market Cap: £673m
Dividend Yield: 4.3% (2018: 5%, 2019: 5.3%)
Dividend Cover: 1.4x
Forward P/E: 16.9x
Payment and bill processor PayPoint might not operate the most exciting business in the FTSE, but this ATM operator is a reliable, highly-profitable, cash-generative business, which has delivered significant dividend growth over the past five years.
Between 2012 and 2016, its dividend increased steadily with earnings, growing from 26.5p to 42.5p, with the yield jumping from 4.4% to 5.7% during that time. Its share price increased some 60% in 2016, before falling steeply towards the end of the year on the back of dull half-year results.
In 2017, shares have stayed relatively flat, but with dividends forecast to increase steadily in 2018 and 19, this reliable dividend payer could be a decent pick for income seekers. In 2019, the firm is predicting a 51.71p payout, although the cover could be a little higher.
Like its FTSE 250 peer IG, PayPoint also has impressive 5 and 10-year growth rates for its dividend, 12.20% and 13.57% respectively, and over the past five years, its ROE has averaged 23%! PayPoint also has a pretty impressive ten consecutive years of dividend growth.
What does the company do? House Builder
Market Cap: £6.47bn
Dividend Yield: 5.2%
Dividend Cover: 1.9x
Forward P/E: 10.2
House builder Persimmon, named after a Derby winning horse in the 19th century, is a very profitable business, bringing in around 24% of its revenues as pre-tax profit and paying out rather large dividends on the back on it.
Its EPS has quadrupled since 2012, and it hasn't been afraid of raising its dividends to match. In its most recent results, it enjoyed 8% revenue growth to £3.14bn, 23% underlying profit growth to £782m, underlying earnings growth of 19% to 205p/share, and raised its dividend to 110p to boot.
ROCE (Return on average capital employed) increased 23% to 39.4%, and there was a 41% growth in cash generation pre-capital returns to £681m. Due to the bumper results, the Board announced that it would be paying out an additional 25p a share in its Capital Return Plan!
Lucky Persimmon shareholders are on track to get a cash return of £9 a share by 2021, a 45% increase from the original 2012 plan to pay out £1.9bn, £6.20 a share. Those holding Persimmon since 2012 have also seen a very impressive 220%+ return in share price appreciation.
Because of the recent rise in its dividend, Persimmon has a 5-year div growth rate of 68% and a 10-year rate of 11%, but it's worth noting that this rapid increase is a relatively new policy. Still, with the 2012 plan exceeded and with an average ROE over the past five years of 20%, Persimmon is one of our favourites.
What does the company do? House Builder
Market Cap: £3.41bn
Dividend Yield: 3.8%
Dividend Cover: 2.9x
Forward P/E: 9
Another impressive dividend paying house builder is Bellway. Like Persimmon, Bellway has been reporting robust results despite the uncertainties surrounding the UK's break from the European Union. In its most recent results, revenue grew 27%, profit +34.3%, EPS +42%, and its dividend increased a massive 42%!
The company has a disciplined approach towards investing has seen a strong ROCE, rising to 28.2% from 23.9% last year. Between 2015-16, it reduced its debt dramatically, with the balance sheet going from -£38.5m to positive £26.5m.
It's achieved quite incredible EPS growth since 2012, increasing it 58%, 36%, 76%, 45%, and 39% respectively during that time. Its dividend has gone from 20p, with a yield of 2.5%, to 100p, with a yield of 5.2%, during this period too!
Regarding payout reliability, it's raised its dividend for seven consecutive years in a row, and its 5-year div growth is a not too shabby 50%! While its 10-year average is 12%. Its 5-year average return on equity is 19.3%. The level of cover provided by its earnings is impressive at nearly 3x showing there should be further scope to increase dividends going forwards.
On a forward P/E of just 9, this FTSE 100 firm could be a bargain for dividend investors, although it's share price has increased markedly in the past 5 years (+320%). It is forecasting a more modest 4% yield in the next two years, and does face Brexit uncertainty.
(Bonus pick) Plus500
I hold this stock
What does the company do? Trading Platform
Market Cap: £512m
Dividend Yield: 11%
Dividend Cover: 1.7x
Forward P/E: 5.5
Since Plus500 listed in 2013 at a valuation of $200m, it has paid out a huge $330m in dividends, which is a crazy - and no, your eyes aren't fooling you, it genuinely is yielding 11% at its current share price.
I've added Plus500 as a bonus pick because this AIM-listed trading platform isn't everybody's cup of tea. It has had run-ins with the FCA and other regulators a few times now and, as a result, has suffered a few share price collapses in the past couple of years.
PLUS trades at a huge discount to its peers IG Group and CMC markets, at just 5.5x earnings. If you combine that with the fact that Plus is a profit-making machine (churning out a whopping 46.3% PBT margin in its latest results), and a history of paying out very generous dividends, you have a truly excellent 11% yield.
Plus500 is a very well oiled, mobile-driven trading platform for the CFD market, and as such it generates a lot of cash with a small cost base. It regularly beats forecasts and had an exceptionally profitable period last year due to the uncertainty caused by Brexit and Trump.
What's the catch? Aside from the risk associated with the upcoming FCA regulation tightening (it has the potential to impact the 20% of Plus500's revenues that are earned in the UK), there is also an Israeli withholding tax on 25% of the dividend payout, but you can reduce this to 15% if you fill out the right forms.
Stocks also worth a mention
A few other great dividend payers that deserve mention are:
More than 18 years of consecutive dividend growth, and decent 5 and 10-year growth rates (7%, 5%)
Also has more than 18 consecutive years of growth, with fantastic 5/10 year growth rates of 18.03% and 13.89%
RPC has 17 years of payout growth and 13% growth over 5 and ten years.
Ashtead has ten years of increasing payouts and exceptional 5 and 10-year growth rates: 50%, 32%
St. James's Place
One of the fastest ever entrants to the FTSE 100 has 13 years of consecutive div growth under its belt, with 5 and 10-year averages of 33%, and 25% respectively