Here’s a summary of three dividend stocks that continue to attract my interest. I already own shares in one of them and, if I had some spare cash, I’d be happy to include the other two in my portfolio.
Keeping the lights on
National Grid (LSE:NG.) enjoys monopoly status in its electricity and gas markets. Its cash flows are therefore reliable, which means it’s able to pay a generous dividend. It last cut its payout to shareholders (like me) in 2011.
Trading for the six months ended 30 September 2023 was in line with expectations. Consequently, it increased its interim dividend by 8.7%, to 19.4p. Assuming the final dividend is raised by the same percentage, the stock’s currently yielding around 6.1%.
National Grid remains on track to increase its earnings per share by 6%-8% from its 2020-2021 baseline, up until 2026. If realised, I’m sure the dividend will continue its upwards trajectory.
But the company is vulnerable to regulatory changes and political scrutiny if ‘excessive’ profits are made. However, I’m unaware of any proposals to restructure any of the markets in which it operates.
Paving the way for future growth
Topps Tiles (LSE:TPT) is a retailer with 304 shops and three showrooms. Its products are sold to domestic and trade customers.
Given the cyclical nature of the industry in which it operates, the stock can be volatile. It has a beta of 1.42, which means if the wider market moves by 10% then, on average, it will see a 14.2% change in its share price. For comparison, National Grid has a beta of 0.32.
Since the pandemic, it’s had three successive years of record growth. For its 2022 financial year, it declared a dividend of 3.6p. I think it could pay 4p this year. If I’m right, its shares are presently yielding over 8%.
The company has a medium-term target of 20% market share — “1 in 5 by 2025” — which it now hopes to achieve “significantly ahead of schedule“.
However, the company is very small (its market cap is less than £100m), which means it might not have the financial firepower to withstand another economic downturn. And operating a chain of stores is a tough business.
But its management team successfully navigated the company through the dark days of Covid, which gives me confidence for the future.
My final dividend stock is Diversified Energy Company (LSE:DEC). It operates gas fields in the United States, which makes it unpopular with ethical investors. However, DEC insists its policy of buying existing wells and extending their operating lives — rather than developing new ones — is better for the environment.
The company has a good track record of increasing its dividends. Its 2022 payout was 54% higher than four years earlier. I expect another increase in 2023 to, possibly, 17.75 cents. If correct, based on the current dollar-sterling exchange rate, the stock’s yielding 21%.
However, the company has borrowed heavily to fund its expansion. Its debt is currently around 2.5 times its adjusted earnings, which I think is on the high side.
But the price of 80% of its output is fixed for the next 12 months, which means it has significant certainty over its future cash flows, helping to ensure that it doesn’t over-borrow.