Why there are no ‘perfect’ FTSE 100 dividend stocks I’d buy right now

Edward Sheldon explains why he’s struggling to find attractive dividend opportunities in the FTSE 100 index (INDEXFTSE:UKX) at present.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

CC0 Public Domain

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

What makes the ‘perfect’ dividend stock? Is there even such a thing? In my opinion, the key to dividend investing involves investing in companies that consistently increase their dividend payouts. This way, an investor can really capitalise on the power of compounding, reinvesting a higher amount each year. Furthermore, this strategy is likely to generate capital growth in the long term as the higher yields on offer push stock prices up over time.

To my mind, a perfect dividend stock is a company with an excellent dividend growth track record, and a certain set of characteristics that indicate that the dividend growth is likely to continue. Here’s what I look for in a dividend stock.

The perfect dividend stock

In the search for the ideal stock, a good starting place is the company’s current dividend yield. I generally look for a yield of between 4% and 5.5%. Anything less than 4% is a little underwhelming (especially as inflation creeps up) and anything higher than 5.5% is approaching a level that might be considered unsustainable. Next, I check the company’s recent dividend growth history. Ideally I like to see growth of 5% to 10% a year over the last half decade.

To achieve this kind of return, a company generally has to be increasing its turnover and profitability so I look for both revenue and earnings rises of at least 5% a year in the same period. 

To ensure dividend sustainability, I like to see a dividend coverage ratio of at least two. Furthermore, the company’s debt-to-equity ratio should be under 50%, as I don’t want a company that is burdened by large interest payments.  

Lastly, the company should enjoy a fairly constant demand for its products, and should trade on a P/E ratio of 15 or less. That’s not asking too much, is it?

FTSE 100 screen

Well, when it comes to the FTSE 100 index at present, it is asking too much. Indeed, when a stock ‘screen’ with the criteria above is applied to the FTSE 100 index, it returns a grand total of zero stocks. There’s not a single company in the index that has those characteristics right now. So where does the dividend investor go from here?

Three options

I’ve got three main options. First, I could look at dividend opportunities outside the FTSE 100. However, when the same stock screen is applied to the UK market as a whole, it still returns zero stocks. Clearly, I’m being too fussy in the search for the perfect dividend stock.

Next, I could relax my criteria. For example, if I lower my required yield to 3.5% and my dividend cover to 1.5 times, five names show up across the UK market: easyJet, Bellway, Bovis Homes, Numis and Bloomsbury Publishing.

EasyJet and Bovis are forecast to cut their dividends this year so I’ll rule them out, however Bellway looks like an interesting opportunity with a yield of 3.8% and P/E ratio of just eight. Having said that, housebuilding is a cyclical industry and therefore I still wouldn’t classify the stock as ‘perfect’.

Lastly, a sensible option may be to wait for a market pullback. That way, as share prices decline, and dividend yields rise, more stocks will filter into my perfect dividend screen, resulting in more potential dividend investment opportunities. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »