I own a range of dividend stocks in my Stocks and Shares ISA. And that’s unlikely to change any time soon.
However, recently I was thinking about the dividend shares I’d choose for my account if I could only select three. And here are the names I came up with.
Paying dividends since the 1930s
With a choice of only three, I’d want stocks I could bank on for dividend payouts. So, I’d go for dividend reliability over yield.
With that in mind, my first pick would be orthopaedic technology company Smith & Nephew (LSE: SN.). A FTSE 100 business, it has paid a dividend every year since 1937. Currently, it sports a forward-looking yield of about 3.1%.
Looking beyond the company’s incredible dividend track record, I like the valuation here. At present, the stock has a forward-looking P/E ratio of just 13, which I see as attractive given that the company is generating decent growth and looks set to benefit from the world’s ageing population in the years ahead.
Of course, while Smith & Nephew has an outstanding historical dividend track record, there are no guarantees that it will continue to reward investors with income.
However, with the dividend coverage ratio (a measure of dividend security) currently sitting at over two, I think there’s a good chance it will.
20+ consecutive increases
Another stock with an outstanding track record when it comes to dividends is alcoholic beverages giant Diageo (LSE: DGE), which owns Johnnie Walker and a lot of other popular spirits brands.
It has now registered over 20 consecutive dividend increases, which puts it in an elite group of stocks. It also has a forward-looking yield of about 3.1%.
Diageo is facing a few challenges right now. Recently, it advised that consumers across the Latin America and Caribbean (LAC) region had been downtrading to cheaper brands. These issues could persist in the near term.
Yet the long-term growth story looks attractive, to my mind.
In the long run, the company should benefit from a number of trends including rising wealth in emerging markets, the growth of the travel industry, and the increasing demand for premium drinks.
This long-term outlook, and the dividend track record, is why I’d pick this stock over others.
Healthy yield
Finally, my third pick would be consumer staples giant Unilever (LSE: ULVR).
This is another company with a fantastic dividend track record. It has been paying dividends since 1929, and since the early 1950s has compounded its payout by around 7%-8% per year. Currently, the forward-looking yield is around 4.2%.
Given Unilever’s amazing track record, and its exposure to fast-growing emerging markets, the stock tends to trade at a premium to the FTSE 100. At present, its forward-looking P/E ratio is about 16.
I’m not too concerned about this, however. In a recent fund update, top UK fund manager Nick Train (who has a big position here) noted that Bloomberg’s analysts estimated the value of Unilever’s divisions at €178bn, compared to its current enterprise value of around €117bn.
In other words, the company is currently trading at a discount to the sum of its parts.
Train’s view was that, in theory, shares of a company like Unilever should be valued at a premium to its parts.
This leads me to believe there could be value on offer here.
