Being able to achieve financial independence is the goal of almost every investor. Without a doubt, dividends are crucial to meeting this target. Research has shown that dividends will double your investment returns over the long term, and the higher the yield is, the better.
Kcom (LSE: KCOM) has all the hallmarks of an excellent dividend stock and at the time of writing shares in the telecommunications company support a dividend yield of 6.5%.
Return to growth
Over the past few years, Kcom has struggled with rising customer churn thanks to increasing competition, two factors that have weighed heavily on the company’s share price. Management has also been investing heavily in the group’s offering. For the year to the end of March, the company reported a pre-tax profit of £30.5m, down from £88.7m in the year-ago period as operating costs rose to £299m from £257m.
This restructuring is expected to simplify the group and improve profit margins. Management has aligned all of Kcom’s businesses under one brand and is focusing on the operational performance of two segments, Hull & East Yorkshire and Enterprise. In these two markets, the company has almost no competition. It is now focused on investing in its fibre network within these two regions which should drive long-term growth for both the company and shareholders, without distractions.
Excluding last year’s poor performance, between year-end 31 March 2013 and 31 March 2016, the company generated an average annual pre-tax profit of £51m compared to a total dividend cost of around £30m. If the company can return to this historic level of profitability, it looks as if the group’s highly attractive dividend yield is here to stay.
Cash is king
Insurance services provider Redde (LSE: REDD) also appears to be a top dividend stock. At the time of writing, shares in the company support a dividend yield of 6.3%. For the year ending 30 June, analysts have pencilled-in earnings per share of 10.5p, the same level as the dividend payout, giving a dividend cover of just one. These figures may not suggest that Redde’s dividend is really all that sustainable but just like Kcom, looking at the company’s cash figures gives a different picture.
Cash flow from operations is a more reliable indicator of dividend strength than earnings per share, as the latter metric is easily manipulated. If a company does not have the cash to fund a dividend, no matter how strong its earnings are, the payout is not sustainable. For the six months to the end of December, Redde earned cash from operations of £22.3m; dividends paid cost the group just under £15m, easily covered by operational cash flows.
Based on these figures then, Redde’s 6.3% dividend yield looks safe and highly attractive in the current low-interest rate environment.
Dividends: The fastest way to a million
Dividends are essential for building wealth over the long term and thanks to the miracle of compounding, they can significantly increase your chances of being able to retire early and achieve financial independence.
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Rupert Hargreaves has no position in any shares mentioned. 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.