The FTSE 100 has fallen by nearly 15% since the start of June. I don’t know if we’re heading for another big stock market crash, but I’m building up a list of quality dividend stocks I’d like to buy if the market slumps.
In this piece, I’m going to look at two shares from my list. Although I think they look reasonably priced now, I’d really like a chance to buy into these proven performers on the cheap.
The best retail share?
My first pick is fashion and homewares retailer Next (LSE: NXT). It might seem odd to consider investing in high street stores when so much retail has shifted online, but Next is big online too. More importantly, as sales continue to shift online, the company has already made plans to gradually close its stores if they become unprofitable.
Next’s latest sales figures suggest to me it’ll operate fewer stores in the future. During the three months to 24 October, online sales rose by 23%, while store sales fell by 18%.
However, what matters most is total sales rose by 4.1%. This suggests customers still find the group’s offer attractive. This is probably helped by the growing range of third-party brands now sold through Next’s online marketplace.
Why I’d buy Next
Despite this headwind, Next’s management feels confident enough to upgrade the profit guidance for the year to a mid-estimate of £365m, up from £300m in September. That’s an impressive increase in such a short period, highlighting strong recent trading.
Indeed, despite the impact of lockdown earlier this year, the group remains one of the most profitable UK retailers — it has much higher profit margins than big online names such as ASOS and Boohoo.
Looking ahead to next year, Next stock trades on around 15 times forecast earnings, with a dividend yield of 2.7%. I think that’s a fair price, but I’d jump at the chance to pick up this dividend stock in a market slump.
An overlooked dividend stock?
My second choice is a company that’s less well known. Industrial group IMI (LSE: IMI) specialises in fluid engineering. It makes parts and equipment used in sectors including healthcare, energy, and transportation.
Trading this year has been stronger than I expected, helped by a one-off increase in ventilator sales due to coronavirus. According to an update last week, the company now expects total sales this year to be just 5% lower than last year.
I think that’s a good result in the circumstances, considering that some of the firm’s customers closed their factories during lockdown.
IMI’s strong trading is consistent with its long-term record. Over the last 20 years, IMI’s share price has risen fourfold. Until this year, the group’s dividend hadn’t been cut since at least 1993.
These are unusually strong figures for an industrial firm, which makes me think the company has a differentiated product range and a strong management culture. Other attractions include double-digit profit margins and low levels of debt.
IMI currently trades on 14 times 2021 forecast earnings. That’s okay, but I’d like to buy this FTSE 250 dividend stock a little more cheaply. So I’ll be watching closely over the coming months.
