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Why I’d cruise through 2020 with this FTSE 100 dividend stock

Carnival (LSE: CCL), the British-American cruise operator, is well known for the extensive fleet that has made it the largest leisure travel company in the world.  However, it is often overlooked as one of the highest-paying dividend stocks of the FTSE 100 right now.

In fact, for the last five years, the company has been growing its dividend yield at a surprisingly fast rate. Add to that the fact that it pays out roughly 21% of its cash flow in dividends. At its current dividend yield of around 4.4% at the time of writing, I believe Carnival should be on the watch list of every serious income investor for the year.

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Carnival has challenges ahead, but not forever

Generally, the cruise business is passing through challenging times. Demand has been low, regulations in some quarters have become tight, and to rub salt in the wound, just 3.5% of both American and European consumers have ever taken a cruise in their lifetimes.

However, the industry can easily reverse this trend. All it needs to do is to concentrate on ageing citizens who can easily shore up demand for cruise services. Fortunately enough, it is already doing that. And Carnival, with over 100 ships – the largest fleet of its peers is best positioned to benefit the most.

Moreover, with the company’s particular efforts to grow its capacity and expand its reach, it will not be long until we start seeing substantial improvement in the demand for its services, especially in Europe and Asia. Then it is expected to surpass its last $5 billion in sales for the coming years.

Carnival isn’t perfect, but nothing is

As appealing as it is as an income stock, Carnival is not perfect, but what is? Demand for the cruise service has been low, with a very small percentage of American and European consumers seeming to be interested in it.

The major saving grace for Carnival in the long term is the increasing number of ageing people who have been the largest consumers of its service. So if the company’s concerted efforts in expanding its share of the overseas cruise vacations market pays off, its balance sheet – which is still the strongest in the industry – will be further improved.

Hence, Carnival is a buy, in my opinion. If you consider its modest 10× price-to-earnings ratio, its reasonable 4.4% dividend yield and a healthy balance sheet that seems impossible to ever show any sign of weakness, concerns about the current short-term low demand for its services will fall apart.

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Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...

He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.

With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

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Pi De Jonge has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. 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.