Dividend Yield or Dividend Growth! What is the best way to identify the best dividend stocks?

Dividend Yield or Dividend Growth! What is the best way to identify the best dividend stocks?

The current Coronavirus crisis in China and several geopolitical tensions have created a sense of tension among global investors. Investors are mostly worried about earning returns in this uncertain environment.

In a country like Australia, where interest rates are currently at record low levels, dividend stocks are viewed by investors as an attractive investment opportunity.

Highest Dividend Yield Stocks

Analysts generally analyze dividends yields to know the best performing dividend stocks on the exchange. We have noticed that for quite some time, Alumina Limited (ASX: AWC) has been sitting at the top of our list of highest dividend yield stocks. Below Alumina, we have Whitehaven Coal Ltd (ASX: WHC) on the list, which currently has an annual dividend yield of 10.81%.

Let us discuss these stocks in detail.

Alumina Limited (ASX:AWC)

Alumina Limited is the closest thing in the world to a listed, pure play alumina company. Compared to its industry peers, it is almost fully focused on refining the intermediate alumina product in the aluminium supply chain. As per ASX, Alumina Limited currently has an annual dividend yield of 12.26%.

In September 2019, Alumina Limited paid a dividend of 4.4 US cents per share (cps) for H1 FY19 (six months ending 30 June 2019) which was lower than the dividend of 8.6 US cpc paid during the previous corresponding period (pcp).

The Board’s policy on dividends is that it intends on an annual basis to distribute net cash from operations, after capital contributions back into the AWAC joint venture, after debt servicing and after corporate cost commitments have been met. In terms of dividends, the year 2018 was a record year for shareholders.

At the time of the release of its Q4 2019 earnings, CEO, Mike Ferraro, commented that Year on year AWAC has improved performance in areas which it can control; both mining and refining annual production is 4% higher than 2018 and the average annual cost of alumina production is 7% lower over the same period; he also told that these factors have contributed to fourth quarter 2019 net distributions from AWAC being similar to the previous quarter despite the average alumina price falling further.

Whitehaven Coal Ltd (ASX:WHC),

Whitehaven Coal Ltd (ASX:WHC), a leading Australian producer of premium-quality coal, is currently trading at a price of $2.540 with a market cap of $2.66 billion.

Last year, the company provided record returns to shareholders with a final dividend of 30 cents, taking full year dividends to 50 cents per share.

Some other major highlights of last year include:

  • TRIFR of 6.16 at 30 June, 11% below the previous year and below the NSW average;
  • Record equity ROM coal production of 18.4Mt, up 4% YOY
  • Equity sales including purchased coal of 17.6Mt, up 2% YOY
  • Record Underlying EBITDA and NPAT before significant items of $1,041.7m and $564.9m respectively

The company recently released its December 2019 quarter results wherein it reported 3.1 Mt ROM coal production for the quarter, down by 58% on the previous corresponding period (pcp). Notably, during the quarter, the company completed the acquisition of EDF Trading Australia Pty Limited, which owns a 7.5% interest in the Narrabri underground mine.

The company recently updated its FY20 guidance which is as follows:

FY20 Guidance (Source: Company Reports) 

Growing Dividends

Although dividend yield analysis is one of the most common and simplest methods of identifying good dividend stocks, it should not be the only criterion for selecting a stock as many times, dividend yields are inflated or deflated due to sudden increase or decrease of the share price. One can identify good dividend stock by simply looking at the growth in dividends over the years.

Let us look at look at few stocks which have been witnessing growth in their dividends.

Shaver Shop (ASX:SSG)

Australian specialty retailer Shaver Shop (ASX:SSG) has been executing a relatively aggressive franchise buy-back and new store roll-out program over the last 5 years or so.

Last year, the Board declared dividends of 4.5 cents per share (100% franked), in-line with the company’s  dividend policy to payout approximately 60-80% of cash net profit after tax and was an increase of 0.3 cents (or 7.1%) on the 4.2 cents per share declared in FY2018.

The company believes that its dividend amount per share and level of franking is sustainable at current levels for the foreseeable future whilst still allowing the company to invest in key growth opportunities like its omni-retail initiatives and store refit strategies – both of which were key drivers of same store sales growth in the second half of 2019.

In summary, Shaver Shop’s business remains very healthy and its board remains committed to driving attractive returns for shareholders. Shaver Shop’s resilience has been shown through its ability to generate these returns over both the ups and the downs of the general retail and economic environment.

In the past six months, SSG stock provided a return of 48.89% to its shareholders. The stock currently has an annual dividend yield of 6.72%.

ARB Corporation Limited (ASX:ARB)

ARB Corporation Limited (ASX: ARB) is primarily involved in the distribution and selling motor vehicle accessories as well as light metal engineering works in Australia.

The company’s dividends per share have grown steadily over the past 10 years with special dividends paid in 2009/10 and 2014/15. 

As per the company’s market update, the company’s net profit in the half-year to 31 December 2019 is expected to lower than the previous corresponding period and along with this ARB expects to report a reduction in net profit after tax of around 7.4%, reflecting the significant strengthening of the Thai baht which has caused an increase in the company’s costs on a range of products manufactured in ARB’s Thai factories. Results for the half-year are expected to be released on 18 February 2020.

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There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.

Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.

As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.

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