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Why I’d buy dividend stocks Lloyds and Johnson Matthey plc

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We all know that past performance is not a guide to future performance. But when investing in stocks, I believe that a company’s history can tell us a quite lot about what its future might be like.

That’s especially true for mature businesses such as chemicals group Johnson Matthey (LSE: JMAT). This 200 year-old firm’s main activity today is making catalytic converters for vehicles. It wasn’t always this way, and no doubt it will change again in the future. For example, the group is currently investing in battery technology.

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However, one thing that has been fairly constant at Johnson Matthey is the board’s commitment to dividend growth. The group’s payout has increased every year since at least 1999, the earliest year for which I could find records. That’s at least 18 years of continuous dividend growth, during which the firm’s annual payout to shareholders has tripled from 19p to 76p per share.

A true buy and forget stock?

Broker forecasts for the current year suggest a dividend of 80.6p per share, implying a yield of 2.5%. That’s below the FTSE 100 average, but should be covered 2.6 times by earnings, making a cut unlikely and supporting future growth, even if earnings slow.

Another positive is the group’s net debt of £890m, which is fairly modest when compared to the group’s profits. Nor is there a big pension deficit — it was just £60m at the end of September.

Johnson Matthey shares currently trade on about 15 times forward earnings, with a prospective yield of 2.5%. It’s a price I’d be happy to pay for a blue chip investment I could tuck away and forget for a decade.

A potential winner

Lloyds Banking Group (LSE: LLOY) is even older than Johnson Matthey, but its record is not quite so spotless. The impact of the financial crisis meant that dividend payments only resumed in 2014, after the firm had racked up several years of ugly losses.

However, the story today is very different. Lloyds has lower costs and much stronger profits than some peers. And the shares still look quite affordable to me. City forecasts for 2018 put the stock on a forecast P/E of 9.7, with a prospective yield of 6.6%.

This valuation is also supported by tangible net assets of 53.5p per share, giving a price/tangible book value ratio of 1.3. That’s fairly reasonable, for a profitable and healthy bank.

What could go wrong?

Lloyds’ retail banking model has proved successful over the last few years. But it’s heavily dependent on the health of the UK economy.

Most of the group’s profits come from mortgages, small business lending and credit cards. An increase in bad debts or a slowdown in lending could hit the bank’s profits harder than some rivals.

However, even if this does happen, I don’t think there’s much risk of a serious meltdown. Lloyds’ balance sheet is much stronger than it was in 2009. I’d expect the bank to handle a recession without too much drama.

And of course, the next recession could still be some way off. Fund manager Neil Woodford is one notable investor who has backed Lloyds. He believes the UK economy is likely to remain healthy. If this view is correct, then this historic bank could continue to do well for some time yet.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

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