When it comes to dividend shares, I’m only interested in owning businesses capable of delivering sustainable long-term income. Achieving this is far easier said than done. Apart from having to remain relevant for decades, firms have to outmanoeuvre competitors while simultaneously growing their cash flows. Don’t forget this is how dividends are ultimately funded and expanded.
The London Stock Exchange is home to a vast array of dividend-paying stocks. But finding future Aristocrats is no easy feat. And in most cases, a business will fall short. But I’ve spotted a few promising enterprises that might have what it takes. With that in mind, let’s explore three that are already in my income portfolio.
Energy, renovation and infrastructure
Greencoat UK Wind (LSE:UKW), Howden Joinery (LSE:HWDN), and Somero Enterprises (LSE:SOM) are three distinctly different businesses operating with their own unique approach. However, there are some similarities.
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Greencoat is capitalising on the renewable energy revolution, Howdens on home renovation, and Somero on industrial infrastructure. While technology’s rapidly changing the world as we know it, all three sectors are likely to be around for decades. And with their market-leading positions, these companies should follow suit.
Greencoat’s portfolio of wind farms is already the largest in the UK. And since demand for electricity’s only going up, the company has little trouble generating vast amounts of free cash flow at a high margin.
Howden’s in a similar position. The UK continues to suffer from a housing shortage, resulting in almost half of all properties being older than 50 years. Subsequently, the demand for home renovation continues to rise.
As for Somero’s laser-guided concrete laying screed machines, the group’s having little trouble finding opportunities to sell or lease its technologies to construction teams around the globe. The US is proving to be a particularly fruitful market thanks to the government’s enormous $1trn investment in revamping public infrastructure across the country.
Digging into dividends
Out of the three stocks, Greencoat’s currently leading the charge in terms of consecutive payout hikes. The group’s increased the dividend per share for nine years in a row, while Howden Joinery’s sitting at four years. Although it’s worth pointing out that before the pandemic came along, shareholders were enjoying an eight-year streak.
The odd one out is Somero, who has been a bit all over the place when it comes to shareholder returns. But digging a bit deeper reveals why. Unlike the other two businesses, cash generation from screed machines is far lumpier. Apart from being exposed to the cyclical nature of construction, the firm also has to deal with unpredictable weather conditions, which can delay projects.
Yet despite this volatility, compared to 10 years ago, dividends have increased by almost 10 times – a trend that looks set to continue in the long run.
Of course, these businesses aren’t without their weaknesses. Greencoat is highly dependent on energy prices, which are controlled and regulated, eliminating any form of pricing power. Howden’s is at the mercy of raw material price inflation. And Somero, as previously highlighted has been getting continuously handicapped by bad weather conditions.
Nevertheless, all three dividend shares look set to deliver long term value and passive income, in my opinion. That’s why I feel these risks are worth taking for the potential reward.
