Like all investors, I love dividends. However, trying to find the market’s best and most reliable is not an easy process. I want to avoid ending up on the receiving end of a dividend cut, which can often result in capital losses adding up to far more than the income received.
So, rather than chasing the market’s highest yields, I’m looking for the highest quality payouts and I’m willing to sacrifice yield for quality.
Air Partner (LSE: AIR) is a great example. At the time of writing shares in the company currently support a dividend yield of 4.4%, which is more than the market average, but there are higher payouts out there. Still, what’s attractive about this one is the quality.
Cash rich
Air Partner is a cash-rich business and management is trying to grow earnings slowly through select acquisitions. Thanks to these acquisitions, statutory profit before tax increased 38.6% in the year to 31 January. Excluding customer cash deposits, group cash rose by a third from £3m to £3.9m — enough to fund the dividend for nearly two years if profits evaporated.
Management has stated that Air Partner’s dividend payout will be covered twice by earnings per share so if earnings continue to grow at a double-digit rate, shareholders will be well rewarded.
Special payouts
Shares in Next (LSE: NXT) also support a relatively average dividend yield of 3.6% at the time of writing, although it’s the company’s hidden income that excites me.
Next has a history of returning cash to shareholders, and in the company’s full-year 2016 results release, management said it will return £225m to investors this year via ordinary dividends and £255m to investors via special dividends. This cash return works out at around £3.31 per share, implying a dividend yield at current prices of 7.5%.
Once again, this payout looks to be relatively high quality as the £255m being returned is surplus cash. If trading performance deteriorates, management can dial back returns and conserve cash for another day.
Making progress
Royal Dutch Shell (LSE: RDSB) may not be everybody’s idea of a high-quality dividend stock, but with a yield of 6.8% at current prices, all dividend investors should consider the company.
There have been plenty of warnings about Shell’s ability to maintain its dividend over the past two years as the price of oil has collapsed but the company’s first quarter results showed that the firm has what it takes to operate in a world of lower oil prices and maintain its dividend.
Specifically, during the quarter the company generated $5.2bn in cash from operations, enough to pay the dividend and reduce gearing from 28% to 27.2% quarter-on-quarter. These results were achieved with an average oil price of $54.61 per barrel during the period, showing that even if oil prices never go above $60 again, Shell can quite easily afford to both reduce debt and maintain its hefty dividend payout.
