As an income investor I hold some of the big FTSE 100 names. I also like to dig a little deeper to find smaller dividend stocks with growth potential. Today I’m focusing on two defensive stocks I think could be among the best dividend shares to buy today.
Best dividend share in retail?
One of the big winners from the retail lockdown last year was B&M European Value Retail (LSE: BME).
The firm’s stores — which sell a value range of food, household goods, and seasonal items — were classified as essential retail and allowed to stay open. B&M’s out-of-town stores were easy to drive to and a more convenient size for a quick shop than larger supermarkets.
The group’s sales rose by 26% to £4.8bn during the most recent financial year, which ended on 31 March. Pre-tax profit doubled to £525m during the same period, while the dividend rose by 140% to 17.3p per share.
The company doesn’t expect this rate of growth to be maintained, and neither do I. But B&M’s mix of cheap staple items and ever-changing promotional items means that customers visit regularly. I expect many of the new shoppers who started visiting B&M stores last year will stay loyal.
Trading so far this year shows sales flattening out compared to last year. But the company is continuing to open new stores and is seeing strong growth with its store rollout in France.
The main risk I can see is that increased competition might put pressure on B&M’s profit margins and reduce the group’s growth potential. So far, I don’t see much sign of this. But I think it’s a real risk, given how successful the company has been.
I’d also be concerned if CEO Simon Arora or Trading Director Bobby Arora — who own 11% of the company — decided to leave B&M.
Of course, all investments carry some risk. I’m comfortable with the outlook for B&M and tempted by the stock’s 3.6% dividend yield, given the group’s record of growth. On a medium-term view, I think this could be one of the best dividend shares out there today.
I’d invest in sausages
Sausages are a popular food in pretty much all western cultures. They’re cheap, tasty, and easy to cook. One thing all sausages have in common is that they need a skin to hold the meat together.
That’s where my next pick, Devro (LSE: DVO), comes in. This £370m company is one of the world’s biggest suppliers of “collagen casings for food” — otherwise known as sausage skins.
This Glasgow-based company has been in business for 85 years and now serves customers in more than 100 countries. Perhaps its biggest challenge is to find ways to continue growing, when most of its largest markets are quite mature.
However, management say that demand from Asian markets is steadily increasing. I think the risks are already reflected in Devro’s valuation, which prices the stock on just 12 times forecast earnings.
Devro’s dividend hasn’t been cut for 20 years and currently offers a yield of 4.2%. I see this business as a below-the-radar choice that’s one of the best dividend shares on the market today. This stock is on the shortlist to buy for my portfolio.