Dividend investing is a great way to build your wealth. Recurring payments from FTSE 100 firms increase shareholder returns by compounding. This helps you to buy more shares.
If you have £3k to invest, or indeed any other considerable amount, finding the best dividend stocks may seriously improve your investing returns.
However, many companies have recently cancelled or reduced their dividend payments due to the global shutdown. This means finding reliable dividend payers is getting more difficult.
The best dividend stocks have two specific characteristics
Good dividend stocks, with wide economic moats and solid dividend cover, are becoming harder to find.
A wide economic moat is the sustainable advantage a company has over its competitors. This makes it harder for peers to copy a firm’s strategy. And solid dividend cover means a firm can cover its dividend payments with earnings. Usually, the higher the ratio, the less risky the dividend.
I think there are only a few dividend-paying companies on the FTSE 100 that have both these attributes. Two are listed below.
1. FTSE 100 stalwart GlaxoSmithKline
Pharmaceutical giant GlaxoSmithKline (LSE: GSK) is well-renowned for its innovative product pipeline. It also has a reputation for a huge repertoire of patent-protected drugs.
From Calpol to Beechams powders, and Horlicks to flu vaccines, Glaxo’s market-leading offerings pervade our daily lives. This makes it extremely hard for its peers to compete with its market positioning.
Moreover, Glaxo uses its extensive resources to continually bring to market new healthcare products. And its vast manufacturing and distribution capability will be used by the US government to supply 100 million doses of a COVID-19 vaccine.
Glaxo is currently trading around 1,435p and offers a relatively impressive 5.4% dividend yield. Some analysts estimate the company’s fair value around 1,800p. Consequently, it appears to be undervalued by the FTSE 100.
With a dividend cover ratio of 1.5, Glaxo is able to cover its payments with earnings. Usually, I like to see a ratio of 2.0 or above. However, given the current economic climate, I think Glaxo’s dividend ratio is acceptable.
2. BAE Systems
Defence and aerospace behemoth BAE Systems (LSE: BA) has long-standing relationships with many global customers. Indeed, one of the most notable is the US Department of Defense. And if US defence spending grows as predicted, the firm will likely benefit with sales.
BAE Systems leverages these historic relationships with technical know-how and impressive engineering capability. As a result, it has a huge advantage with respect to its peers.
Currently trading on the FTSE 100 at around 503p, BAE sits below some analysts’ fair value estimate of 570p. This means there is potential for future capital gains from the shares.
In addition, the firm boasts a relatively good dividend yield of 4.6%. Moreover, the dividend ratio cover is 2.0. And with predictable and stable cash flows from long-term contracts, the payments are fairly low risk. It may be one of the best dividends for sale on the FTSE 100 right now.
If you have £3k to invest, I think you’ll prosper from having either, or both, of these dividend stocks in your portfolio.
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Rachael FitzGerald-Finch owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. 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.