My favourite dividend plays are those companies that have a defensive income stream and record of returning this cash to investors.
Lok’n Store (LSE: LOK) is a great example. The company provides self-storage and managed storage services across the country, a service that has seen steady growth in demand over the past five years. Lok has met this need with extra capacity helping net profit to double since 2013.
According to a trading update issued by the firm this morning, it looks as if this growth is set to continue. The update notes that following a successful 2017 “trading in the first half of FY2018 continues to be strong with January 2018 delivering the highest ever level of new storage sales enquiries in a single month.”
First-half like-for-like revenue was up 6.9% year-on-year and to help complement growth, the firm is currently developing six new “landmark stores” to build out its existing portfolio of landmark stores in Broadstairs, Bristol, Hemel Hempstead, and Gillingham. All six new stores are “in prominent locations with large catchment areas that demonstrate the company’s ability to source high-quality sites adding to future sales and earnings growth.“
City analysts expect these new stores to help Lok grow its earnings per share by 13% for fiscal 2018 and 14% for fiscal 2019 to 13.8p. Based on these numbers, the shares are trading at a relatively demanding forward P/E of 31.2, a valuation that might put some investors off. However’ Lok’s most attractive quality is its dividend potential. Over the past five years, the per share payout has doubled, and analysts are expecting 10% per annum growth for the next few years. With £11.4m of cash on the balance sheet, it looks as if the firm has plenty of headroom to meet these projections. At the time of writing the shares support a dividend yield of 3.1%.
Another dividend stock I like the look of is Safestore Holdings (LSE: SAFE).
Safestore uses the same business model as Lok, and its income stream looks just as secure, although the one advantage Safestore has over Lok is that the shares are cheaper. The stock currently trades at the forward P/E of just 18.4, so for value income hunters, this might be a better buy.
Over the past five years the group’s dividend payout to shareholders has risen by 100% and this year, City analysts are projecting a 60% jump in the payout to 16p per share, giving the stock dividend yield of 3.2%. Once again, this dividend yield is around the same as the broader market. However, Safestore’s record of growing the payout at a double-digit rate every year makes it more attractive for dividend growth investors.
The company’s latest set of results, for the year ended 31 October 2017, showed revenue growth of 10% to £130m while underlying EBITDA grew 11% to £73m on a constant currency basis. Free cash flow for the year Jumped nearly 20% to £50m, easily enough to cover the total dividend outlay for the year of just under £26m and fund further expansion.
Doubling the dividend
Unfortunately, the one drawback of both these storage businesses is that they are both relatively low margin, which may limit dividend growth over the long-term. With this being the case, if you're looking for something with a bit more dividend potential, our analysts are highly excited about this firm's outlook.
This company has already achieved an impressive record of earnings for investors, is profitable and has increased its dividend payout by 100% over the past five years.
Click here to learn more about what we believe is one of the market's top small-caps today!
Rupert Hargreaves owns no share 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.