Finding high quality dividend stocks is likely to become more difficult this year. Rising inflation and a FTSE 100 above 7,000 points mean they're likely to become more in demand, which could lead to compressed yields and relatively unappealing valuations. However, today has seen a stock which yields 5.5% reporting a strong performance over the Christmas period. Could it prove to be a sound buy for the long term?
Despite tough comparatives, pub company Marston's(LSE: MARS) recorded a fifth successive year of like-for-like (LFL) sales growth over the Christmas period. In its Destination and Premium categories, LFL sales were 1.5% ahead of last year. This included LFL food sales growth of 0.6%, wet LFL sales growth of 1.4% and strong growth in room income. And with operating margins at a similar level to last year, the company's overall profitability is on the up.
Marston's plans to open at least 20 new pub-restaurants and five lodges in the current year. Its Brewing division continues to perform well, with its own-brewed volume 3% higher than last year and operating margins slightly ahead. Similarly, in the Taverns and Leased segments, LFL sales growth of 1.5% and profit growth of 2% respectively show that the company's strategy is working well.
Of course, the problem with investing in pub companies is their lack of stability. They're highly dependent on the performance of the wider economy and with Brexit negotiations around the corner, the outlook for consumer spending is highly uncertain. As such, buying stocks with more resilient and robust dividends may be a lower-risk strategy, with companies such as National Grid(LSE: NG) offering a 4.9% yield.
However, where Marston's is attractive is in terms of its dividend growth potential. Its shareholder payouts are covered 1.9 times by profit, which indicates they could rise at a faster pace than the company's bottom line over the medium term. And with earnings forecast to rise by 2% this year and 5% next, the 5.5% yield should rise by at least as much as inflation. Furthermore, a price-to-earnings (P/E) ratio of 9.4 indicates that there's upward re-rating potential on offer.
A lower-risk option
By contrast, National Grid's P/E ratio is 14.8 and while it's aiming to raise dividends by at least as much as inflation, its coverage ratio of 1.4 indicates that they may fail to keep up with Marston's dividend growth. As such, the pub operator could deliver higher rewards over the medium term, since it has a lower valuation and scope for greater dividend growth.
Despite this, National Grid seems to be the better overall income play. It may lack the same level of potential rewards as Marston's, but it more than makes up for this with its low-risk business model and track record of stability. Given the uncertain outlook for the UK economy, this lower-risk profile could be a major ally over the medium term.
But is this income stock an even better buy?
Given the choice on offer within the FTSE 100, there may be another stock which offers even greater appeal. In fact the company in question has been named as A Top Income Share From The Motley Fool.
A potent mix of a relatively high yield, dividend growth prospects and a sound business model mean that this stock is worth a closer look. It could improve your returns in 2017 and beyond.
Click here to find out all about it - doing so is completely free and comes without any obligation.
Peter Stephens owns shares of National Grid. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.