2 top dividend stocks I'd keep on buying

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Very few shareholders like erratic share prices, and that's understandable. But for dividend investors, embracing volatility can provide opportunities to snag better cash returns when prices drop.

Look at BBA Aviation(LSE: BBA), for example. I commented on the aviation services company's 2016 results in March, pointing out that the share price had been recovering and I suggested there was more to come. And after Tuesday's first-half figures, I remain convinced.

Underlying pre-tax profit came in 36% ahead of the same period last year, with underlying EPS up 33%. Net debt dropped by 5.9%, and the interim dividend was lifted by 5%.

Chief executive Wayne Edmunds spoke of the firm's "ability to grow underlying operating profit ahead of market growth," but it's that dividend I specifically want to look at.

Dividend growth

The rise reflects "confidence in ... future growth prospects," and supports the current consensus for a hike to around 10.6p for the current year. That would yield 3.4% on the current 308p share price, which is decent, but investors who have been buying regularly will have locked-in better effective yields.

Throughout the share price downturn, BBA has been keeping its well-covered dividends growing nicely. And if you'd bought shares in early 2016, you could have secured an effective dividend yield of 6.6% this year based on your buying price (assuming forecasts are accurate). Similarly, shares bought five years ago would now be setting their owners up for an effective 2017 yield of 8%.

Defence cash

There's a similar situation at Meggitt(LSE: MGGT), with the aerospace and defence company having been suffering from a cyclical downturn.

But again, while earnings were under pressure, Meggitt's strong cover meant its progressive dividend has kept on rising -- last year's was boosted by 4.9%, well ahead of inflation, and there's a 6.8% uplift on the cards for 2017.

A "solid H1 performance" reported today enabled the interim dividend to be raised by 5%. And even if an underlying pre-tax profit gain of just 4% was perhaps slightly disappointing (the shares are down 1.4% to 496p as I write), the company has maintained its full-year guidance after having got net debt down by 12%.

And chief executive Stephen Young said: "Over the medium term, we are set to benefit from improving conditions in many of our end markets and the strategic investments we have made in the business over the past five years."

The mooted yield stands at a modest 3.3% on today's share price -- but again, regular investors would have tied down some impressive yields by buying in the dips. In January 2016 they'd have locked-in an effective 4.5%, and those smart enough to have bought back in early 2009 could be enjoying 13% this year.

The best dividends

For this kind of dividend investing, I reckon you need three things. Firstly, good cover by earnings is essential, as that helps protect your income during earnings downturns.

Secondly, you should insist on progressive dividends rising at least in line with inflation (or better, like these two, beating it).

And the icing on the cake comes from buying shares in cyclical businesses (which satisfy the first two criteria -- those are essential, as you don't want ones that cut their dividends during downturns).

If you keep topping up your shareholdings, perhaps every year, you'll secure better effective yields in the dips. Oh, and you should want your share prices to be erratic.

Beating the downturns

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended BBA Aviation. 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.