How do you judge the best dividend stocks? I’m always on the hunt for new income stocks, so I’ve been looking through the FTSE 100 for possible buys.
To search the whole index efficiently, I use a screening tool to find companies with at least 10 years of dividend growth, a dividend yield of over 2%, and a payout that’s covered at least 1.8 times by earnings.
In this article I want to look at three of the companies highlighted by my search.
Big tech growth + income
My first pick is accountancy software specialist The Sage Group (LSE: SGE). This £8bn business doesn’t seem to have cut its dividend since 1990. Over that time, the payout has risen from 0.14p per share to the current level of 16.9p per share.
In the old days, Sage sold its accountancy software to businesses on disks. These days the firm’s systems are in the cloud. A growing number of clients choose to access these services online, giving the firm a stable and growing stream of recurring revenue.
The Sage share price has performed strongly in recent years. The stock is not exactly a bargain. As I write, the shares are trading on about 25 times 2020 forecast earnings and offer a dividend yield of 2.3%.
I think this is fair value for now. But given the group’s strong track record, I think Sage stock still makes sense as a long-term buy.
An essential service
Catering giant Compass Group (LSE: CPG) provides outsourced catering at more than 55,000 sites in 45 countries. The company employs 600,000 people and serves 5.5 billion meals each year. It’s a big business.
It’s also been a very profitable investment for its shareholders. The Compass share price has double in six years and its dividend payout has risen every year since 2001.
Steady operational growth has seen sales rise by an average of 8% since 2014, while operating profits have risen by an average of 5.6% each year over the same period.
However, what really attracts me to this business is its ability to generate high returns on money invested in new opportunities. This has allowed the group to fund growth and dividends without needing too much debt.
Although the stock’s 2020 forecast dividend yield is just 2.3%, the payout should be covered twice by earnings and looks very safe to me. I expect its market-beating growth to continue.
A defensive winner
Defence spending is a large part of many government budgets, especially in the US, the UK, and parts of the Middle East. That’s good news for FTSE 100 defence group BAE Systems (LSE: BA), which makes most of its money in these regions.
This UK-based engineering group can trace its roots back through more than 400 years of British engineering and technology. Today it’s a high-tech engineering group whose operations include shipbuilding, aircraft, electronics, and cyber warfare.
Working on big, multi-year projects means that BAE’s short-term financial performance is sometimes lumpy. But over longer periods, the group tends to enjoy strong cash generation and solid profit margins.
A strong run over the last year has pushed the BAE share price up by 25% to nearly 650p. As a result, the dividend yield has fallen to just 3.6%. However, this payout hasn’t been cut for 20 years and should be covered twice by earnings this year. I believe BAE stock remains a good income buy for patient investors.
Income-seeking investors like you won’t want to miss out on this timely opportunity…
Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this out-of-favour business that’s throwing off gobs of cash!
But here’s the really exciting part…
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.
Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Income Share… free of charge!
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group and Sage Group. 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.