Once again, I find myself counting my pennies and scouring the FTSE 250 for my next big dividend buy. There’s nothing I love more than checking my dividend statement at the end of the month and calculating my passive income. It’s satisfying to see my money hard at work for me.
But I’ve made mistakes in the past and my portfolio still holds a few duds. I live in eternal hope that they one day recover.
So when I buy dividend stocks these days, I make sure to analyse the companies more closely. The yield and payout ratio are one thing, the balance sheet another. But to genuinely get a feel for where things are headed, I need to dig deeper.
Past, present and future
First things first, I want to invest in a stock that I can trust. Not just one that performs well — it must pay dividends regularly and without interruption. To do that, I need to look to the past. A good dividend payer should have a long and consistent track record of making regular payments.
For example, consider two of my favourite dividend stocks. Both have a solid track record of payments.
- Primary Health Properties has a 7% yield but it’s currently unprofitable and in debt.
- Ashmore Group, by comparison, has a 7.9% yield and is profitable with no debt.
Seems like an obvious choice? Not so fast.
Ashmore’s earnings have been declining at a rate of 21.8% per year and are forecast to continue falling. Its payout ratio (the proportion of earnings paid to shareholders as dividends) is already over 120%. And it could rise further if earnings fall. Primary Health, on the other hand, has a 67% payout ratio. It’s enjoyed strong earnings growth and is forecast to continue growing at a rate of 40% per year.
A company with a high payout ratio and declining earnings may have to cut dividends if things don’t improve soon. Another example of a stock I hold is ITV. Earnings are also forecast to decline in the coming year but with a relatively low payout ratio of only 46%, I’m not worried just yet.
A promising stock to consider
With the above in mind, one up-and-coming stock I like the look of today is MONY Group (LSE: MONY). It owns the popular price comparison site MoneySuperMarket.com. The price is down 28% this year but is up 13% over two years. It has a 6.2% yield and an acceptable payout ratio of 86%.
Dividends have increased steadily since 2007, rising at a rate of 8.68% per year with no cuts.
However, its growth could hit a few snags. MONY faces competition from GoCompare and Compare the Market, both of which threaten its market share. Moreover, its business model relies on a strong economy and enthusiastic spending — any dip could send the price spiralling. This happened in 2020 and it’s struggled to recover since.
Yet despite the weak price performance in the past few years, earnings are forecast to grow 9.6% a year going forward. Even more promisingly, its return on equity (ROE) is forecast to be over 42% in three years.
That puts it high on my list of potential dividend stocks to consider buying next month.