Every investor loves dividends but finding the market's best dividend stocks is not easy. That's why the top ones are worth their weight in gold.
Rank Group(LSE: RNK) is an excellent example. Today the company announced a 12% hike in its full year dividend payout alongside its full year results. For the period, pre-tax profit fell to £79.7m from £85.5m in the year ago period. On an underlying basis, however, pre-tax profit rose because last year's figures were flattered by a £10m exceptional gain from the disposal of freehold buildings.
The operator of Grosvenor Casinos and Mecca Bingo is struggling to grow in the "challenging" UK retail environment. But the group's online business is growing rapidly with its digital business reporting 63% growth in operating profit for the year. That's compared to a 1% fall in like-for-like revenues offline.
It's Rank's dividend growth potential that really makes this company a great income stock. For example, the dividend payout is covered 2.1 times by earnings per share leaving plenty of room for growth and flexibility if earnings start to slide. City analysts believe the company will increase its payout further next year to 8.1p giving a yield of 3.6% of current prices.
Over the past four years, management has increased the payout by 59%, and if this trend continues for the next four years, I estimate shares in the company will support a payout of 11.6p by 2022, giving a dividend yield of 5% at current prices.
With earnings per share of 16.1p predicted for the financial year ending 30 June 2018, even if Rank's earnings per share do not grow over the next five years, a dividend of 11.6p is still realistic.
Kingfisher(LSE: KGF) is sliding today after the company reported its second quarter results for the three months to the end of July. Like-for-like sales declined by 1.9%, or by 1.7% in constant currency terms. On a reported basis, total group sales increased 4%. Still, despite these downbeat sales figures management remains confident the company can hit City earnings targets for the next two years as cost-cutting and efficiency savings help improve margins.
Analysts are projecting a 4% decline in earnings per share for the year ending 31 January 2018, but growth is expected to pick up in the year after with earnings expansion of 15% projected.
Plenty of cash for dividends
Just like Rank, Kingfisher looks to be an attractive long term income stock. The shares currently support a dividend yield of 3.5%, and the payout is covered 2.2 times by earnings per share. The per share payout is projected to rise 12% next year, and if the company hits City growth forecasts as expected, dividend cover will rise to 2.3 times. What's more, the company had £641m of net cash on the balance sheet at the end of fiscal 2016, adding further support to the payout.
As well as the dividend, management is also returning cash to investors via a £600m share buyback. So far, £368m of this total has already been returned and considering the group's healthy cash generation, when the current plan is completed I would not rule out further cash returns.
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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.