Most investors think of FTSE 100 companies when they want to find the best dividend stocks. But hunting a little further down the list of Britain’s best businesses could offer greater rewards.
When seeking the best dividend stocks, I want to see high yields now, consistent dividend per share increases, and plenty of dividend cover so those boosts are affordable.
Trading up
I think Plus500 (LSE: PLUS) is one of the better dividend stocks on the market today, offering a 7.5% headline yield.
The company’s long-term policy is to return at least 50% of net profits to shareholders each half year, with at least 50% of that through dividends. I like that kind of ambition. It says to me that CEO David Zruia recognises and wants to reward shareholders for helping to keep the company afloat. Plus500 dividends are also covered three times by earnings. That makes it one of the most robust businesses on the FSTE 250.
Plus500 shares do trade on a tiny P/E ratio of 4.4. Offering value, high income and the prospect of solid future returns make an attractive business.
Be aware, though, that Plus500 is an Israeli company and as such any dividends are subject to a withholding tax of 25% for holders of ordinary shares. Shareholders can apply to the Israeli tax authority for a reduction to 15% withholding tax, but this may complicate the issue too much to make the shares worth holding.
As a share and contracts-for-difference trading platform, its profits soared in the pandemic. While it runs a relatively lean business model, Plus500 will need to ramp up its marketing to pull in more new traders. If Plus500 can’t continue to attract and retain active customers, profits could fall and with them the dividend.
Aiming for the best dividend stocks
Novice investors may avoid AIM-listed companies, but they could be missing out on the best dividend stocks, in my opinion. These businesses tend to more focused on fast growth than paying back shareholders.
However, there is one that has hit the top of my best dividend stocks list.
Personal Group (LSE: PGH) is relatively small with a market cap of just £77m. It pays a dividend today of 7.3%. The business has a number of strings to its bow, including offering health insurance and employee benefits programmes. It was founded in 1984, so it’s no upstart. And it has produced sizeable annual profits of £8m+ in the last two years on revenues of around £70m. Let’s consult the best dividend stocks checklist again. Are dividends affordable? Yes. The business has 1.2 times cover. But I’d like this number to be a little higher, for safety’s sake.
A P/E ratio of 11 is well below the AIM average, making it decent value in my eyes. The company announced in FY20 results it had £20m in cash with no debt.
It has secured new contracts with Royal Mail and Kingfisher, which helps justify its future outlook. And outgoing Chairman Mark Winlow said in May the company had cut costs by selling through video conferencing.
This being a small AIM company, there are inherent risks of failing to sign up enough customers, and it faces significant competition in the insurance space. So the wide ‘moat’ favoured by Warren Buffett will need expanding as the company grows. I’d still buy both picks at these prices.
