Big dividend stocks are often seen as the safest source of equity income. But the reality is that the safety of a company’s dividend doesn’t depend on its size.
I believe earnings growth, cash generation and debt levels are bigger factors in achieving a reliable dividend income. Today I’m going to look at two dividend stocks which I believe could deliver outstanding cash returns for long-term investors.
Essential infrastructure
HICL Infrastructure Company Limited (LSE: HICL) specialises in investments in public sector infrastructure. Recent examples include stakes in a Dutch prison and a motorway.
The group announced today that it has completed the acquisition of a 36.6% interest in Affinity Water Group for £269m. Affinity is the largest water-only company in England and Wales, measured by revenue and by population served.
In total, HICL owns about 115 such investments spread across seven countries, including the UK, USA and Australia. These are generally long-term assets which generate stable and predictable incomes.
This attribute is reflected in HICL’s dividend, which has risen by an average of 2% every year since the group’s flotation in 2006.
2% per year might not seem very exciting, but this has taken place during a period of low interest rates and low inflation. Rather than using borrowed cash to boost dividend payments, HICL’s management has ensured that the dividend has been broadly covered by free cash flow since at least 2011.
I believe this conservative approach means a cut is much less likely. With the stock yielding 4.3% at present, I reckon HICL could be an excellent ‘buy and forget’ dividend stock.
A more adventurous choice
Small-cap financial group Hansard Global (LSE: HSD) specialises in selling long-term savings and life assurance plans to customers around the world. The group only sells through financial advisers and other financial institutions and uses a multi-lingual web platform to support its operations.
Hansard is expected to pay a dividend of 8.95p per share for the current year. That’s equivalent to a stonking 10% dividend yield at the current share price of 88p. Of course, there is a catch. The group’s payout is expected to fall by 50% to 4.5p next year. This will cut the forecast yield to 5% but is needed — according to management — to fund new growth initiatives.
Indeed, the group does appear to have significant turnaround potential. Earnings per share are expected to rise by 31% to 8.5p in 2018, putting the stock on a forecast P/E of about 10.
There’s also another source of potential upside. Hansard is currently the subject of a number of legal cases by European customers alleging that the investment products they were sold — mainly during the financial crisis — did not perform satisfactorily.
The group believes it has “strong defences to such claims”, which currently total £13.8m. However, regulatory restrictions mean that these writs require the firm to reserve cash which would otherwise be available for distribution to shareholders.
If Hansard’s view that the claims being made against it are unjustified is correct, then it’s possible that the group will be able to return a significant amount of additional cash to shareholders over the coming years.
Investing in Hansard isn’t without risk, but I believe the stock could deliver attractive returns for patient investors.