I think owning dividend stocks is one of the best ways of generating truly passive income. Even so, investors needs to be picky.
One way of separating the wheat from the chaff is to look for companies that have better-than-average records of consistently raising their bi-annual payouts.
Here are three examples, all of which come from the FTSE 250 and probably remain under the radar of many private investors.
Cranswick
Meat supplier Cranswick (LSE: CWK) is a great passive income stock, in my view. The company has a long history of growing its annual cash returns to investors. In fact, hikes in recent years have often been by double-digit percentages. So while no dividend stream can be guaranteed, this is exactly the sort of form I’m looking for.
Based on recent trading, I have no concerns over this trend continuing. In its most recent update, the FTSE 250 stock said trading over the festive period has been “comfortably ahead” of the same time in 2020. This was despite “unprecedented industry-wide labour and supply chain challenges” and cost inflation.
Will we still be talking about these headwinds in a few years though? I sincerely doubt it.
As good as the dividend hikes have been, Cranswick is a fairly low-margin business. Admittedly, the 2.2% forecast yield isn’t all that generous compared to others in the UK market either.
Still, the amount of free cash flow (essentially, what allows a company to pay passive income to holders) is looking very healthy indeed. This makes me believe the company will continue growing its dividends in the years ahead.
Bodycote
Heat treatment and thermal processing specialist Bodycote (LSE: BOY) is another FTSE 250 member that’s been increasing its annual payouts to investors for a long time. This quality tends to be indicative of a very resilient company.
As things stand, Bodycote is expected to yield 21p per share in FY22. That becomes a yield of 3%. Again, this fairly average return doesn’t bother me. I’d rather invest in a company where my passive income is likely to be paid and also increasing every year.
The shares have fallen 20% in 2022 so far, which highlights how even solid dividend payers can be just as volatile as more growth-focused stocks. Headwinds, such as supply chain disruption and cost inflation, won’t go away overnight either.
Nevertheless, Bodycote seems to be trading just fine. This month’s full-year results revealed a 7.1% rise in revenues to almost £616m. Operating margins also rose to 15.4%.
Clarkson
Shipping services provider Clarkson (LSE: CKN) strikes me as another stock that many private investors might be unfamiliar with. Similar to the other two shares mentioned here, the £1.1bn-cap company regularly lifts its annual dividend. In fact, it’s been doing this for the last 19 years!
A forecast 2.5% yield in 2022 is expected to be covered almost twice by profit. That last bit is important. The greater the dividend cover, the less likely it is that the payment will be cut.
On the downside, shares in Clarkson aren’t a bargain, at almost 21 times earnings. This potentially makes the stock a more risky buy.
Even so, the balance sheet looks pretty solid to me. Earlier this month, Clarkson also announced record underlying pre-tax profit of £69.4m for 2021. Maintaining this kind of form should allow the passive income to keep ticking higher.
