Income stocks are the bread and butter of any portfolio. But finding the best income stocks can be tough going, I mean, where do you start?
Looking under-the-radar for the best dividend stocks is the strategy I like to follow. The great thing about uncovered income champions is that they usually offer a higher dividend yield than better-known candidates. What’s more, because these companies are out of the limelight, management usually takes a more conservative approach to dividend growth, which may lead some investors to take a step back. But for long-term payout growth, a conservative approach is always best.
Out of fashion
Photo-Me International (LSE: PHTM) is one dividend stock that’s been on my radar for some time. Photo-Me runs photo booths and automated washing machines around the world — hardly glamorous businesses.
The company’s flagship photo booth business has been going downhill for some time as most consumers are now armed with a camera-ready smartphone at all times.
But despite the rise of the smartphone, Photo-Me has continued to grow through innovation and select acquisitions. As revenue has stagnated, pre-tax profit has doubled since 2012 and this year City analysts are forecasting a dividend payout of 7p per share, up nearly 200% from 2012’s 2.5p per share payout.
Also, the company announced today that it has snapped up Asda’s photo business for up to £6m, another bolt-on acquisition to boost growth. City analysts are forecasting 6% earnings per share growth for the group this year to 8.2p, indicating that the shares trade at a forward P/E of 18.
At the time of writing shares in Photo-Me support a dividend yield of 4%,and the payout is covered 1.2 times by earnings per share. As of April 30, 2016, the company had net cash of £60m.
Defensive income
KCOM (LSE: KCOM) is a traditional income investment. The company provides telecoms services, a highly defensive business where income is predictable and management has a certain degree of clarity over cash flows.
This outlook clarity has given management the ability to hike Kcom’s dividend payout to shareholders by 10% per annum since 2012. City analysts are forecasting a dividend payout per share of 6p this year for a yield of 5.1% at time of writing.
Unfortunately, Kcom has struggled to grow its earnings over the past few years, so the company might not appeal to growth investors. For 2016 City analysts are forecasting that the group’s earnings per share will decline by 7%. However, over the past five years, earnings per share have remained relatively stagnant, bouncing between 7.9p and 7p as the company moves away from legacy businesses and diversifies into new growth markets.
The shares do look slightly expensive as they trade at a forward P/E of 17.5 even though earnings are set to fall for the next two years.