What is the ideal dividend investment? Well, to me, it is a company that is reasonably priced, which is growing earnings year by year, and which is highly cash-generative with a high and rising dividend yield.
While the high street is not a place you’d expect to find dividend investments, retail stalwarts Next (LSE: NXT) and Marks and Spencer (LSE: MKS) are, I think, both worthy of consideration as dividend investments. But which is better?
Next
Next is a company that shows how a clear long-term vision and business plan can turn an also-ran company into a market leader. Since the Credit Crunch, this business has increased in value seven-fold. Why is it so successful? Because, to me, it very much represents the future of retail.
In this world of endless choice, some shoppers purchase products via their computer or tablet. Many browse mail-order directories. Many still enjoy the old-fashioned pleasure of walking through a shop. You may order for home delivery, click and collect, or buy a product in store.
Next gives you — the customer — the choice, and makes sure that, whichever way you make your purchase, the product and the shopping experience is perfect.
The company has expanded in every direction: into internet shopping, internationally (the company is present in countries across Europe, Asia, Africa and the Americas), and into furniture and homeware.
But has momentum driven the share price so high that it may tread water now? This may be the case: the 2014 P/E ratio is 18.7, with a dividend yield of 1.6%, and the 2015 P/E ratio is 16.9, with the dividend yield rising to 4.8%. The dividend yield and the growth rate make the company appealing, but I think it is fully priced.
Marks and Spencer
Where Next is a company that seems to know exactly where it is going, Marks and Spencer seems to be a company that is still finding its way. Its clothing ranges in particular still seem stuck in the past, and are some way behind Next.
However, it is steadily growing its food business, and its international stores are the source of most its recent growth — it now has nearly as many stores abroad as it has in the UK. It is leveraging the strength of its brand internationally — it is still, after all, one of the UK’s most famous brands.
Despite its travails in Britain, this international expansion means that consensus forecasts growth nearly as rapid as that of Next over the next few years.
And if you check the fundamentals, this company is also cheap: the 2014 P/E ratio is 13.9, with a dividend yield of 4.0, and the 2015 P/E ratio is 12.3, with a dividend yield of 4.2%.
Foolish bottom line
This is a difficult one. Both companies are growing earnings and have an increasing dividend yield, and so would make strong dividend investments. But which is the better investment?
I’m just wondering whether, at the current share prices, Next is the more impressive company, but Marks and Spencer may be the better investment.
