When looking for income stocks to balance out my largely growth-focused portfolio, I know it’s tempting to search for companies returning the most money to their shareholders. However, I also think the best stocks to buy are usually those that are consistently raising their bi-annual or quarterly payouts. Here are three examples from the FTSE 250 I’m considering.
Asset manager Investec (LSE: INVP) is one stock that, 2020 aside, has reliably increased its dividends. I’m intentionally ignoring last year because a global pandemic (and the many dividend cancellations ) will hopefully prove an anomaly.
Based on data from Stockopedia, Investec is down to return 18.7p per share in the current financial year. This would represent a 44% hike to the total payout. At last Friday’s closing price of 298p, that becomes a monster yield of 6.3%. Importantly, this payout looks set to be covered well over twice by profits. In other words, it looks very secure. Another positive with Investec is that its shares look cheap at a little under 8 times earnings.
That said, it’s important for me to be aware that financial stocks such as Investec are vulnerable to economic setbacks. Should the global recovery slow, there’s a possibility that the INVP share price will lose momentum. The stock is also still to recover to pre-Covid levels.
Integrated mobility platform Redde Northgate (LSE: REDD) supplies vehicles to businesses alongside maintenance, repair, recovery and accident services. That sounds dull as ditchwater. However, this is another FTSE 250 constituent with a good record of regularly raising its payouts. And when I’m looking for dividends, that’s all that really matters.
A 17.8p per share return is expected in FY22. That’s a yield of 4.1%. For perspective, the FTSE 250 index itself returns just 1.8%. Like Investec, REDD’s cash returns are protected twice by earnings.
REDD stock recently hit a three-year high as a result of the company snapping up electric vehicle charging equipment supplier ChargedEV. This sounds like a prudent acquisition to me considering the growth expected in this area over the next decade or so as more customers transition away from internal combustion engines.
A P/E of 12 also looks great value as things stand. Then again, REDD doesn’t have the high returns on capital and chunky profit margins I usually look for as a way of lowering risk. So, I’d need to make an exception here.
Speciality chemicals firm Synthomer (LSE: SYNT) is a final example of what I consider to be one of the best stocks to buy for rising income.
Analysts believe that SYNT will return a total of 23.5p to owners in FY21. If this comes to pass, it would represent a doubling of 2020’s payout. Again, this cash return would be easily covered by profit. In fact, Synthomer’s dividend is the safest of those mentioned by this measure.
I’d also be buying a stake in a company in rude health. Synthomer reported a threefold increase in EBITDA (to £322.7m) over the first six months of 2021. Importantly, this was also above that logged for (pre-Covid) H1 2019.
I think this makes the stock — at just below 8 times earnings — look a steal. Even so, I’d be careful not to assume that recent dividend hikes will be replicated. Moreover, no income stream in the world is ever guaranteed.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Synthomer. 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.