In a way, finding the right dividend shares to buy today is more challenging that usual for Stocks and Shares ISA investors.
The threat of a prolonged economic downturn (especially in the UK) puts the earnings of countless British stocks in jeopardy. The strain on corporate profits is being worsened by a steady flow of interest rate rises to curb rampant inflation too.
While investors need to be more careful, there are still stacks of quality dividend shares to buy right now. As an ISA investor, I’m considering buying Greggs (LSE:GRG) shares today.
No matter how hard times are, Britons’ love of a cuppa and a sausage roll remains undimmed. This is what — along with its focus on selling products at low price points — makes the baked goods retailer such a great lifeboat to invest in today.
Today, Greggs announced that like-for-like revenues jumped 17.1% in the first 19 weeks of 2023.
Earnings and dividends to soar?
It’s true that high energy costs and rising wages pose a threat to Greggs’ bottom line. This is why City analysts expect earnings here to edge just 2% higher in 2023.
But with these pressures tipped to moderate from then on — and the business expecting to keep expanding its store estate and investing in its logistics capacity — earnings are predicted to rise by double-digit percentages in the following two years.
This means Greggs is also expected to supercharge the level of dividends it pays out. A modest lift, from 59p per share to 61.4p, is predicted for 2023. Payouts are then tipped to soar 11% and 13% in 2024 and 2025 respectively, to 68.2p and 77.3p.
Standing out from the crowd
On the downside, dividend yields for the next three years still sit below the 3.2% average for FTSE 250 shares. They range between 2.2% and 2.8% through to 2025.
Yet successful long-term dividend investing involves more than buying stocks with big yields today. Creating healthy passive income requires picking shares that can sustainably grow dividends. And as Greggs expands — it has opened 37 net stores in the year to date alone — and although past performance is not an indicator of future results nor are dividends guaranteed, I’m confident it could grow payouts strongly as profits surge.
It’s also worth noting that dividend forecasts for many FTSE 250 shares look vulnerable in the current economic environment. The same can’t be said for Greggs, in my opinion.
As I say, demand for the baker’s goods remain strong even during downturns. And what’s more, predicted dividends are covered between 1.9 times and 2 times by anticipated earnings through the next few years.
Finally, Greggs also has a cash-rich balance sheet to help it hike dividends and pursue its growth programme. Cash and cash equivalents stood at £191.6m at the end of December.
The verdict
Today, Greggs shares trade on a forward price-to-earnings (P/E) ratio of 22.9 times. This elevated rating leaves the business vulnerable to a price correction if trading conditions start to deteriorate.
But I’m encouraged by the company’s ability to keep putting in strong trading updates to the market. And, on balance, I think the retailer is a great buy for both earnings and dividend growth.
