Are these the highest quality dividend stocks outside the FTSE 100?

Edward Sheldon looks at two high quality dividend stocks that aren’t in the FTSE 100 (INDEXFTSE: UKX) index.

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A screen of the FTSE 250 index reveals there are 48 stocks in the index with dividend yields in excess of 4%. However looking over this list of companies, there are plenty of stocks that look questionable from a dividend investing point of view. Falling revenues, erratic earnings, dividend cuts and poor dividend coverage ratios are common.

But dig through the rubble and it’s possible to find FTSE 250 stocks that appear to have excellent dividend prospects. Here are two companies that I believe are high quality dividend stocks.

Greene King

Greene King (LSE: GNK) needs no introduction, being the UK’s leading pub retailer and brewer with over 3,000 pubs, restaurants and hotels across the country. With increased inbound tourism to the UK and recent retail figures showing consumers switching retail spend from products to experiences such as eating/drinking out, Greene King could be a major beneficiary of the trend.

From a dividend perspective, the company certainly has appeal. Greene King has grown its dividend by a compound annual growth rate (CAGR) of 10% since 1980, and in the last five years the dividend has been increased from 23p to 32p per share. That gives a yield of a solid 4.3% at the current share price and with analysts pencilling-in dividends of 34p and 35p for the next two years, dividend growth looks to be on the cards. Furthermore, Greene King’s dividend coverage ratio stands at a healthy level of 2.2, which is higher than many other UK companies with similar yields.  

Obviously, it’s possible that Brexit could negatively affect profitability at Greene King. And it must be noted that the company did cut its dividend marginally in 2009 during the height of the Global Financial Crisis, when consumer confidence declined significantly. The company has said that it’s “alert to a potentially tougher trading environment ahead.”

However, after a 20% fall in the share price this year, I do think the stock is starting to look tempting. Greene King currently trades on a P/E ratio of just 10.3 times next year’s earnings, which given the strong track record of the company, seems very reasonable to me.

If you’re looking for a stock that’s easy to understand, has long-term appeal, and a formidable track record of earnings and dividend growth, Greene King could definitely be worth a look in my opinion.   

Close Brothers Group

Another FTSE 250 company that has an excellent record as a dividend growth stock is Close Brothers Group (LSE: CBG).

Close Brothers provides lending, deposit taking, securities trading and wealth management services to its clients and the consistency of the bank’s profits over the last few years has been impressive.

Revenue and earnings have risen each year since 2011 and shareholders have been rewarded with a healthy dividend that has increased from 40p per share in FY2011 to 57p per share in FY2016. The bank currently yields 4.2% and also enjoys a healthy dividend coverage ratio of 2.3.

Close Brothers recently acknowledged that while Brexit is likely to result in economic uncertainty, the company’s strong balance sheet and established business model would enable it to continue to support its clients, invest in the business and generate returns for shareholders.

Trading on an undemanding P/E ratio of 11.3 next year’s earnings, Close Brothers doesn’t look expensive, and in my mind the stock has strong potential as a high quality dividend stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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