Every investor loves dividends. There's nothing better than watching dividend income drop into your account every quarter. Over the long term, this income can significantly enhance your investment returns.
And in today's low interest rate environment, dividends are vital if you want to achieve the best return on your money.
One of the best dividend stocks out there at the moment is Moss Bros (LSE: MOSB). While other retailers have struggled, this formalwear retailer has continued to expand with earnings per share rising from 2.3p in 2013 to 5.4p for the financial year ending 31 January 2017.
Management has decided to pay out almost all of the company's earnings to shareholders via dividends. The dividend payout of 5.9p per share is not covered by earnings per share. Still, on a cash basis the payout looks secure for the time being. For the financial year ending 31 January, the company generated £16m in cash from operations. It spent £8.8m of this total on capital projects and the total dividend payout amounted to £5.7m. So, not only was the dividend well covered for the year, but the company also generated excess cash after capital spending.
These figures suggest that Moss Bros's dividend yield of 6% is here to stay and if the City estimates are correct, the payout is expected to rise gradually over the next three years, hitting 6.6% by 2019. As long as cash generation continues to improve, there's no reason why the company cannot hit this target. Analysts believe pre-tax profit will rise by around 10% over the same period.
The one downside is that shares in the retailer currently trade at a relatively expensive multiple of 17.5 times forward earnings, which does not leave much room for manoeuvre if it disappoints on earnings growth.
Plus 500(LSE:PLUS) sits at the other end of the valuation spectrum. Shares in the company currently trade at a forward P/E of 9.2 as City analysts have pencilled in a decline in earnings per share of 15% for this year. However, despite the lacklustre growth outlook, shares in the company support a dividend yield of 7.8%.
According to City projections, the payout of 46.8p is covered around one-and-a-half times by earnings per share, even after accounting for the earnings slide.
Proving doubters wrong
Shares in Plus 500 have always sported a high dividend yield because the City has consistently doubted whether or not the company can continue to sustain the payout. So far, the firm has proved all of its doubters wrong and has continued to meet its dividend obligations, despite an increasingly challenging backdrop.
Nonetheless, as regulators around the world start to clamp down on CFD trading, one of Plus 500's specialities, it remains to be seen if the company can continue on its current course. Analysts expect earnings per share to fall by more than a third over the next two years and management's hand may be forced. That being said, even if the company rebases the dividend to the lower earnings figure, the shares will still yield around 6%, based on cover of one-and-a-half times earnings.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.