When seeking the best dividend stocks, I want to see high yields now, consistent dividend per share increases, and plenty of dividend cover so those boosts are affordable.

Trading up

I think Plus500 (LSE: PLUS) is one of the better dividend stocks on the market today, offering a 7.5% headline yield. 

The company’s long-term policy is to return at least 50% of net profits to shareholders each half year, with at least 50% of that through dividends. I like that kind of ambition. It says to me that CEO David Zruia recognises and wants to reward shareholders for helping to keep the company afloat. Plus500 dividends are also covered three times by earnings. That makes it one of the most robust businesses on the FSTE 250.

Plus500 shares do trade on a tiny P/E ratio of 4.4. Offering value, high income and the prospect of solid future returns make an attractive business.   

Be aware, though, that Plus500 is an Israeli company and as such any dividends are subject to a withholding tax of 25% for holders of ordinary shares. Shareholders can apply to the Israeli tax authority for a reduction to 15% withholding tax, but this may complicate the issue too much to make the shares worth holding.

As a share and contracts-for-difference trading platform, its profits soared in the pandemic. While it runs a relatively lean business model, Plus500 will need to ramp up its marketing to pull in more new traders. If Plus500 can’t continue to attract and retain active customers, profits could fall and with them the dividend.

Aiming for the best dividend stocks

Novice investors may avoid AIM-listed companies, but they could be missing out on the best dividend stocks, in my opinion. These businesses tend to more focused on fast growth than paying back shareholders.

However, there is one that has hit the top of my best dividend stocks list.

Personal Group (LSE: PGH) is relatively small with a market cap of just £77m. It pays a dividend today of 7.3%. The business has a number of strings to its bow, including offering health insurance and employee benefits programmes. It was founded in 1984, so it’s no upstart. And it has produced sizeable annual profits of £8m+ in the last two years on revenues of around £70m. Let’s consult the best dividend stocks checklist again. Are dividends affordable? Yes. The business has 1.2 times cover. But I’d like this number to be a little higher, for safety’s sake.

A P/E ratio of 11 is well below the AIM average, making it decent value in my eyes. The company announced in FY20 results it had £20m in cash with no debt.

It has secured new contracts with Royal Mail and Kingfisher, which helps justify its future outlook. And outgoing Chairman Mark Winlow said in May the company had cut costs by selling through video conferencing. 

This being a small AIM company, there are inherent risks of failing to sign up enough customers, and it faces significant competition in the insurance space. So the wide ‘moat’ favoured by Warren Buffett will need expanding as the company grows. I’d still buy both picks at these prices.

In fact, one stock in the index currently has a 6% dividend yield and is expected to deliver further dividend growth in future. Alongside another high-yielder which is listed outside of the FTSE 100, now could be the perfect time to buy it for the long run.

High dividends

The company in question is motor insurance specialist Admiral (LSE: ADM). It has a solid track record of dividend growth. In the last two years it has increased dividends per share by 63%, with it paying out 184.2p per share in dividends in the 2016 and 2017 financial years combined. At its current share price, this would work out as an annualised dividend yield of around 4.7%. However, with dividend growth ahead over the coming year and next year, it offers a significantly higher yield than the FTSE 100.

In fact, Admiral is expected to raise dividends per share by 15.6% this year, followed by further growth of 8.2% next year. As such, its dividend yield for the current year is due to be 5.7%, with this figure set to rise to 6.1% in 2019. As such, it offers a dividend yield that is around 50% higher than that of the FTSE 100. And with its business model continuing to be highly successful in what remains a competitive industry, the prospects for further dividend growth beyond 2019 seem to be favourable.

Improving outlook

Also offering an impressive income outlook is employee services provider Personal Group (LSE: PGH). The company released a positive trading update on Friday which showed that it has made a good start to the year and is performing in line with management expectations. All three of its business segments are performing ahead of the same period of last year, with its salary sacrifice business also delivering encouraging performance.

Looking ahead, the company is expected to deliver a rise in earnings of 5% in the current year, followed by further growth of 9% next year. It remains upbeat about its future prospects according to its recent update, while a focus on rationalising its supply chain could help to make it more efficient over the medium term.

With a dividend yield of around 4.8%, Personal Group could offer an impressive income outlook. It has a sound track record of growing dividends. In the last four years they have risen at an annualised rate of 5.1%. Further growth which is ahead of inflation could be on the cards for the company, which may make it more appealing for income-seeking investors.

But nothing like that happened to the well-named Prudential (LSE: PRU), which has always kept its dividend yields modest but very well covered, and has maintained a healthy low-risk balance sheet. And though shareholders only pocketed a 2.5% yield last year, there are two factors that I think make Prudential a great investment.

One is its steadily growing earnings which have contributed to a climbing share price. EPS has soared by 60% over the past four years, leading to a share price rise that has left the FTSE 100 in its wake — Prudential shares are up 80% over five years, with the Footsie up only 12%.

Beating inflation

Then there’s the progressive nature of the dividend, which has seen the annual payment rocket by 40% between 2013 and 2017. That’s way ahead of inflation, and analysts predict further progressive rises.

With full-year results delivered last week, the Pru said its “capital generation is underpinned by our large and growing in-force business portfolio, and focus on profitable, short-payback business.” And that makes me happy the cash will keep flowing.

The big news is that the firm is to capitalise on its success in Asian markets by splitting itself into two — M&G Prudential focusing on the UK and Europe, and Prudential PLC to continue business in Asia, the US and Africa. 

With the shares on forward P/E multiples of only around 11.5 to 12.5, I’d be happy to hold the existing Prudential today, and I’d be just as happy to own shares in the two demerged companies.

Big yield

In many ways, Personal Group Holdings (LSE: PGH) is quite a contrast to Prudential. Its share price hasn’t done anywhere near as well recently, barely beating the FTSE 100 over five years with a 14% gain. But it’s been paying a significantly higher dividend, with yields breaking 6%.

The firm provides employee benefits, including short-term accident and health insurance, and counts Royal Mail Group as a high-profile customer.

Revenue for 2017 declined from £53.6m to £45.2m, but that was expected and was due to the delayed roll out of its salary sacrifice scheme at Royal Mail (due to an HMRC review of salary sacrifice).

That led to a modest drop in EBITDA, from £11.4m to £10.8m, but that was better than expectations. And Personal Group ended the year with a healthy rise in cash on its books, up from £12.6m to £16.2m, and with no debt.

Cash cow

The dividend was lifted by 3.2% to 22.7p per share, for that yield of 6% on Tuesday’s close of 377p.

Impressive though the company’s progress has been, I reckon it could be only beginning to tap its long-term growth potential. Chief executive Mark Scanlon spoke of “the significant opportunity presented by the employee services market, which is being driven by increasing competition for staff in a tight labour market and recognition of the commercial value of investing in and retaining staff.“

When my colleague Rupert Hargreaves spoke about the company in January, the shares were on a forward P/E of 18, but since then the share price has retreated to drop that ratio 15.7. I think that’s good value for a 6% yielder with tempting growth potential.

Just getting started 

It looks as if Anpario’s growth story is only just getting started. Even though earnings per share are expected to fall by 1% for 2017 (according to the current City consensus) earnings are expected to grow 16% over the next two years to 19.4p by 2019. 

The one downside is that due to the firm’s explosive past growth, the shares are expensive. They currently trade at a forward P/E of 29. Nevertheless, according to a trading update published today, at the end of 2017, the company had a net cash balance of £13.6m, around 12% of its current market cap. Stripping out this cash (approximately 59p per share) gives a forward P/E of 24. This might seem like a high multiple, however compared to the likes of Anpario’s US-listed peer Neogen, which trades at a forward P/E of 54, Anpario appears to be the cheaper bet. 

Going forward, the demand for the company’s products should only grow as the world’s population demands more food. As long as the business continues to reinvest in its offering, earnings should continue to expand along with the firm’s cash balance, and with this being the case, I believe Anpario’s growth is only just getting started. 

Growth and income 

Financial services company Personal Group (LSE: PGH) is another small-cap growth stock that I believe is only just getting started. This business provides employee benefits to workers, such as short-term accident and health insurance. Demand for these services has grown rapidly over the past five years and Personal’s revenue has doubled during this period.

Management expects this trend to continue. In a trading update published at the end of October, CEO Mark Scanlon commented that Personal is “better placed than ever as we enter 2018” as its core business, coupled with new initiatives should help it win contracts from new customers. Indeed, City analysts are expecting earnings per share growth of 7.4% for 2018 off the back of revenue growth of 44%. 

Like Anpario, Personal also has a robust balance sheet, with “cash and deposits of £16.5m and no debt” reported at the end of the first half of 2017. On this basis, cash currently accounts for around 11% of the firm’s current market value. 

Such a hefty cash balance backs up the company’s dividend yield of 4.9%, which is costing around £7m per annum but is easily covered by cash generated from operations. 

The one downside to Personal is, once again, the stock’s valuation. At the time of writing the shares are trading at a forward P/E of 18.2, which might put some investors off. But considering the company’s historical growth record, coupled with its future growth potential, I believe that it’s worth paying a premium to buy into Personal’s story. 

The stock was last 2% lower from Monday’s close and trading at its cheapest since mid-July. However, there is little I can see from today’s numbers that would cause me to sell up.

Personal Group advised that revenues ducked slightly between January and June, to £19.6m from £19.8m in the same 2016 period. This caused pre-tax profit from continuing operations to fall to £3m from £3.1m previously.

However, this bottom-line dip did not stop the employee services star from keeping its progressive dividend policy on track. It hiked the interim dividend to 11.35p per share, up 3.2% year-on-year, assisted in large part by its robust balance sheet — cash and cash deposits clocked in at £16.5m at the half year, and there is no debt to speak of.

Past the worst?

Personal Group has been whacked by changes to employee benefit schemes last year, when the government altered the rules affecting workers’ ability to sacrifice part of their wage for perks like company cars, giving certain tax advantages.

However, it appears to now be over the hump, and chief executive Mark Scanlon said: “We have seen a solid start to the year with the company performing in-line with management’s expectations. We now have greater clarity regarding the outlook of the salary sacrifice market, which has enabled us to clarify our customer offering to deliver a better client experience.”

The City expects the Milton Keynes business to endure another weighty earnings dip in 2017 caused by these aforementioned problems, and an 18% fall is currently predicted. But things are expected to start firing again from next year onwards, and a 7% bottom-line rise is currently predicted. These estimates leave the company dealing on an undemanding forward P/E ratio of 15.3 times.

And this positive long-term outlook is expected to keep Personal Group’s generous dividend programme in business. Last year’s 22p per share total dividend is anticipated to steam to 22.7p in the current period, resulting in a 6.1% yield. And the 23.2p reward forecast for 2018 shoves the yield to an electrifying 6.2%.

Glass giant

Tyman (LSE: TYMN) is another London-quoted stock I reckon could make investors hugely rich in the medium term and beyond. And my faith is backed up by bubbly broker projections.

The door and window manufacturer has been able to introduce handsome dividend hikes each and every year thanks to its rich record of earnings growth. And with analysts predicting further growth of 9% and 7% in 2017 and 2018, shareholder rewards are similarly expected to keep stomping skywards. Consequently Tyman changes hands on a scandalously-low prospective earnings multiple of 11.8 times.

Last year’s 10.5p per share payment is expected to rise to 11.8p in 2017, and again to 12.7p in 2018. These figures create not-so-insignificant yields of 3.6% and 3.9% respectively. And these predictions are also pretty well protected, with dividend coverage registering at 2.3 times for this year and next.

Tyman saw revenues shoot 30% higher between January and June, to £260.4m, thanks to the positive impact of recent acquisitions and strong progress in international markets. I reckon there is plenty of reason for share pickers to give the construction star a long look right now.

Improving results

Reporting on Monday was wealth management company AFH (LSE: AFHP). Its performance in the first six months of the current year has been impressive, with revenues increasing by 19%. Recurring revenue as a percentage of total revenue was 70% versus 66% in the same period of the prior year. This shows that the company’s income prospects may now be more stable than in the past, while a strong balance sheet could support further acquisitions in future.

Strong growth in funds under management of 17% helped to push profit before tax 34% higher to £1.15m. The company could continue to benefit from changing regulations within the wealth management sector, where demand for lower-cost opportunities is causing greater consolidation. AFH’s £10m placing means its cash reserves of £12.6m could be used to fund further acquisitions.

Looking ahead, the company is expected to record a rise in earnings of 92% in the current year, followed by further growth of 28% next year. Despite such a strong growth outlook, AFH’s shares trade on a price-to-earnings growth (PEG) ratio of only 0.4, which suggests that now could be the right time to buy them. They may be 40% up year-to-date, but further share price gains could be on the cards in 2017 and beyond.

Income potential

Also offering an attractive investment proposition within the financial services sector is Personal Group (LSE: PGH). The employee benefits specialist has endured a somewhat mixed period in recent years, with profit growth swinging between positive and negative. However, during the last five years, it has been able to increase dividends per share at a brisk pace. They are up by 5% per annum during that time, which puts Personal Group on a dividend yield of 6.7% right now.

While the company’s dividend growth rate and mixed profit performance has meant that dividend cover is now only 1.1, Personal Group is forecast to increase its bottom line by 7% next year. This should mean that shareholder payouts become more affordable, and may mean they continue to beat the rate of inflation over the medium term.

With Personal Group trading on a price-to-earnings (P/E) ratio of 14, it appears to offer good value for money. That’s especially the case with a number of stocks within the financial services sector now trading at record highs as the FTSE 100 moves higher. As such, buying it could prove to be a shrewd move in the long run.

An uncertain period

The uncertainty in the Let’s Connect business stems from an HMRC review of salary sacrifice. While the results of this were announced in the latter part of the year, the uncertainty beforehand caused a proportion of employers to delay contract decisions for Let’s Connect. Although it represents a relatively small proportion of group profit, by its nature it represents a bigger chunk of group sales.

Therefore, it seems likely that Personal Group’s overall sales and profitability will be negatively impacted by the changes in the current year. However, now that the Autumn Statement has clarified the government’s position, sales for Let’s Connect are expected to be largely unaffected over the medium term. In fact, it recently signed a significant contract with the Royal Mail, while a survey of over 4,000 end users highlighted that the changes to salary sacrifice didn’t impact on the appeal of the company’s services.

Strong underlying performance

The underlying performance (excluding one-off items) of Personal Group in 2016 was encouraging. Profitability for the year was marginally ahead of expectations. This reflects the continued strength of the core insurance business, which saw its fifth consecutive year of record sales.

Similarly, the company’s technology platform Hapi has opened up new opportunities for growth. It has increased Personal Group’s available market in the private sector by 15.7m employees to 26.2m. It’s now well positioned to service over 85% of the UK working population, which should lead to growth opportunities over the medium term.

Outlook

Looking ahead, Personal Group is forecast to record a rise in its earnings of 67% in 2017. When combined with a price-to-earnings (P/E) ratio of 16.1, this equates to a price-to-earnings growth (PEG) ratio of only 0.2. This indicates that there’s a wide margin of safety on offer, which means that even with the negative impact of the Let’s Connect business factored in, Personal Group has strong capital gain prospects.

Similarly, insurance sector peer Prudential (LSE: PRU) could be a star performer in 2017. It’s forecast to record a rise in its earnings of 14% this year, which means that it has a PEG ratio of 0.9. While this is higher than the PEG ratio of Personal Group, Prudential offers far greater diversity, lower risk and a more solid financial footing through which to deliver more growth over the coming years. In addition, it operates in a wide range of geographies, notably in emerging markets where growth in financial services products is likely to rise.

Therefore, Prudential seems to have more appeal than Personal Group based on the risk/reward ratio, although the latter remains a sound long-term buy.