Some of the best dividend stocks on the market are not necessarily companies with the highest dividend yields. I think it is a mistake to concentrate on these stocks because a high dividend yield can often be a sign of stress.
Instead, I concentrate on companies with sustainable dividend yields. This often means a lower yield compared to the highest payouts on offer, but a higher level of cover and more room for growth.
With that in mind, here are two dividend stocks I would buy today for my portfolio with £2,000.
Dividend stocks to buy
The first company on my list is the self-storage operator Safestore Holdings (LSE: SAFE). Based on current City projections, the firm will offer its investors a dividend yield of 2.3% in 2021.
The dividend payout is backed by income from the firm’s real estate portfolio. Over the past nine years, the company has steadily increased its distribution as its property portfolio has grown. Net income has expanded from around £109m in 2015 to £178m, and analysts expect further growth in 2021.
With Safestore’s payout covered 1.7 times by earnings per share, the company has the flexibility to both invest in the business and return cash to investors. As such, I believe it can continue to increase its dividend in the years ahead as management grows the self-storage operation.
Of course, these are just projections at this stage. Increased competition in the self-storage sector could push down profit margins and restrict the company’s cash flows. This would have a detrimental impact on the dividend. An increase in interest rates may also restrict the amount of cash available for dividends if Safestore’s interest bill jumps.
Despite these risks and challenges, I would buy the company for my portfolio dividend stocks right now.
Unloved income
The other company I would buy right now is Brooks Macdonald (LSE: BRK). With a dividend yield of 3.1% at the time of writing, this firm offers more in the way of income than Safestore. The stock also seems to have more room for dividend growth. The payout is covered a healthy 2.4 times by earnings per share at the time of writing.
Brooks offers a range of investment management services and related professional advice to high net worth individuals, charities, and trusts. Demand for these services is only growing as the wealth of the world’s richest is increasing. This implies demand for the group’s services should increase, leading to fee growth and higher profits.
These are the main reasons why I’d buy this firm for my portfolio of dividend stocks. As income grows, I reckon the company will continue to increase the shareholder payout.
That being said, the wealth management sector is incredibly competitive, and fees have been under pressure for years. Brooks’ position in the market, therefore, should not be taken for granted. If competitors start to steal market share, profits could fall.