Have I just bought one of the best UK dividend stocks?

The quality of UK dividend stocks varies, but Kevin Godbold just bought this one, and here’s why.

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My hunt for enduring dividend investments keeps me away from some shares with big yields. And that’s because one of my main selection criteria is a record of consistent trading and financial outcomes.

The quality of UK dividend stocks varies

And steady numbers aren’t always present in the records of big-yielding stocks. For example, many firms in cyclical sectors can produce erratic revenues, cash flow and earnings over time. And that can lead to inconsistent dividend payments to shareholders. Sometimes, company directors stop dividends altogether if a business is trading through a difficult patch.

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Of course, there’s no guarantee dividend payments will continue even when I find a company with a record of steady trading and finances. But I’d rather invest in a dividend-paying company that has got a decent and consistent record than in one that hasn’t. It’s just one of several steps I can take to try to mitigate some of the risks involved with stock investing.

Last week, I bought shares in IG Group (LSE: IGG), the platform provider for traders and investors. The initial attraction for me is the 5.4% dividend yield. With the share price near 805p, City analysts predict that level of shareholder payment for the current trading year to May 2022. However, a year further ahead, analysts expect the payment to rise by around 10%.

I think the company’s business model is interesting — skimming a profit from the activities of traders and investors strikes me as a steady activity. And I reckon there’s evidence of the soundness of that theory in IG’s trading and financial record.

For example, since 2016, the dividend payment has been running at a compound annual growth rate near 6.6%. And backing that up, revenue has been growing at an annualised 12%, normalised earnings per share at almost 18% and operating cash flow at just over 21%.

A steady activity

However, despite that consistent financial record, the share price is only around 4% higher than it was five years ago. And there have been some stomach-churning lurches lower along the way. But, so far, the stock has recovered each time. For example, it’s up by about 18% over the past year.

My guess is stock market investors usually assume IG’s profits will be hit by the economic crisis of the day. But in reality, trading activity tends to increase during times of market volatility. And that can fuel IG’s profits. 

One good example of the effect in action is the recent coronavirus situation — traders and speculators hit the markets in their droves when many were furloughed with time on their hands.

In summary, the dividend has been consistent but the stock price has been erratic. However, I still think this is one of the best UK dividend stocks for me today. And one factor that bolsters my confidence is the firm’s strong balance sheet — there’s a sizeable net cash position in the accounts rather than net debt.

All shares carry risks, but I’m planning on sticking with this one for the long haul.

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Kevin Godbold owns shares on IG Group Holdings. The Motley Fool UK has no position in any of the shares mentioned. 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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