I like dividend stocks. Any money received can be reinvested to increase the total return when trying to grow my portfolio. And I can spend the payouts instead of reinvesting them when I want to start taking income from my investments. So, I’m always looking for great dividend stocks to add to my Stocks and Shares ISA. I think the following are some of the best Footsie picks right now:
Anglo American
Glencore
Investec
Redde Northgate
Taylor Wimpey
Why these stocks? I like above-average yields, a measure of safety in the dividend, and a track record of payout growth.
Above-average yields
The average yield of stocks in the FTSE 100 index is 3.4%. Taylor Wimpey has a forward dividend yield of 9.8%, and Glencore offers 8.8%. Both comfortably beat the Footsie and the highest-yielding UK index, the FTSE Small Cap, which is at 4.2%.
I don’t chase dividend stocks with high yields alone though. Yes, companies that pay oversized dividends that consume too much of their earnings (or even exceed them) pay out a lot. However, they’re unlikely to be investing in their businesses, meaning earnings could stall or fall in the future, and so will the cash I can get from them every year.
Key figures
Stock
Forecast Dividend Yield
Forecast Dividend Cover
Dividend per share 10-year CAGR
Taylor Wimpey
9.8%
2.1x
32.4%
Glencore
8.8%
2.6x
7.1%
Investec
6.6%
2.1x
3.4%
Redde Northgate
6.5%
2.0x
22.6%
Anglo American
6.4%
2.3x
15.4%
Source: Consensus forecasts via the Financial Times stock data pages
Ideally, I’d like to see forecast cover of at least twice what earnings will be. Glencore is expected to cover its dividends 2.6 times with earnings. Anglo American is expected to earn 2.3 times what it pays out in dividends. That’s a measure of safety that I can draw comfort from.
Growing dividend stocks
I prefer my stocks to have a track record of increasing payouts to shareholders. A respectable compound annual growth rate in a company’s dividend per share may signify financial stability and growth. That means Investec might look like a laggard as it grew its dividends by an average of 3.4% over the last 10 years, especially compared to Redde Northgate, which managed a 22.6% growth rate.
However, positive growth is positive growth, and I’m considering historical dividend growth in combination with the forecast yield and cover. But I must remember that past performance isn’t necessarily indicative of future performance. Two of these stocks, Anglo American and Glencore, are mining companies. Inflation might benefit them now, but a recession (perhaps prompted by interest rate rises intended to curb that inflation) would hurt their bottom lines.
Investec is an international banking, investment and wealth management company. Taylor Wimpey is a housebuilder. Redde Northgate makes its money servicing and selling vehicles to businesses. An economic downturn would cause these companies to suffer. All five of these stocks would have their dividends put under pressure in the event of a recession. So, with that in mind, would I add any of these dividend stocks to my portfolio?
Well, Anglo-American is already in there. Investec has been on my watchlist for a while, and now I’m considering the others too. But before pressing the button and buying them this September, I need to assess how well they would combine with the other stocks in my portfolio and take a deeper dive into their financials.
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James J. McCombie owns shares in Anglo American. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.