Hundreds of UK companies have scrapped their dividends. But I would urge investors who rely on dividends to consider trading yield for certainty and ignore cheaper options. Here are what I believe are the two best FTSE 100 dividend stocks to buy right now.
Owning the FTSE 100 index
Being a shareholder in London Stock Exchange Group (LSE: LSE) is something like being the man selling the shovels in a gold rush. As markets tumbled earlier this year, the volume of stocks and other products traded on the LSE’s exchanges increased. Its income and revenue in the first quarter of 2020 rose by 13% and 10% year-on-year.
If things continue like this, then LSE could end up doubling its £1.42bn revenues of as recently as 2015 in 2020. It would be wrong to say that its business as usual at LSE, but it seems to be faring better than most. A strong balance sheet and a resilient business have allowed it to pay a dividend on its stock for the 2019 financial year. As things stand, 2020’s interim dividend looks safe.
At 8,036p the LSE share price is not far off its pre-crash high of 8,416p. In fact, the shares traded at that level on 26 May before falling back. As such, LSE shares are not cheap, as they trade at over 60 times 2019 earnings per share (EPS). So the dividend yield on a trailing 12-month basis is an uninspiring 0.86%.
LSE shares do, however, at least offer a yield. Furthermore, dividends per share had jumped from 0.36p in 2015 to 0.7p in 2019, which represents an 18% annual growth rate. If that carries on, it could end up being a dividend stock with an impressive yield.
Back in March, I recommended RELX (LSE: REL), a publisher of scientific, medical and technical journals, and am pleased to see its share price has risen by 24%. My case was simple. Even allowing for substantial declines in its events business and mild declines in the rest of it, my best guess was that RELX shares were trading for 21 to 24 times 2020 EPS. For me, that’s cheap for a steadily growing company.
Then there was the matter of the dividend yield. In March, and assuming no cuts, it could have been around 2.79%. And right now, the yield on the shares is a reasonable 2.41% calculated on a trailing 12-month basis, and no cuts have been announced or mooted. Unfortunately, RELX shares are not as cheap as they once were. Based on my admittedly crude calculations, they could be trading at 29 times forward 2020 EPS.
Quality dividend stocks
In times like these, an investor might have to pay for quality. Neither RELX nor LSE are cheap, nor do they have eye-watering dividend yields. However, both have demonstrated themselves to have resilient businesses and financial strength, allowing them to pay dividends as plenty of others cut them. It’s no surprise that investors have flocked to them, driving the yield down and the EPS multiple higher.
Apparent bargains are all well and good, but maybe those high-yielding stocks trading at rock bottom valuations are in trouble rather than bargains. For the investor looking for more certainty in their dividends, they might have to sacrifice a bit (or even a lot) of yield, and I think RELX and LSE are the best FTSE 100 dividend stocks to buy right now.
James J. McCombie owns shares in RELX. The Motley Fool UK has recommended RELX. 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.