How can I find my two best UK dividend stocks out of the 1,938 that traded on the London Stock Exchange in February 2023? A screen will help cut this number down to a manageable size.
I want to look for higher-than-average yields that look safe, and I would like a good dividend payment track record. Here are my screening criteria:
- Dividend yield over 4%
- Dividend cover greater than 2
- Interest payments covered by operating income 10 times over or more
- Market capitalisation greater than £50m
- Annual dividend streak of at least 8 years
- Net debt to equity (a measure of leverage) less than 25%
The screen generated 12 results. Here are the two that I think are the best picks from the list.
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Black gold
FTSE 100 stalwart Shell (LSE: SHEL) has managed to maintain an uninterrupted streak of dividend payments for the past 10 years. I take that as a strong indicator of its stability and reliability as a dividend stock. Even during challenging economic times, Shell has continued to pay dividends to its shareholders. And the potential payouts are attractive at the moment as the stock’s dividend yield is 4.54%, which is significantly higher than the FTSE 100 average of 3.5%.
Record profits in the oil and gas industry are being reported now. However, this is a cyclical business, and since it’s currently up, I would worry about it turning down. Earnings are forecasted to fall for the next two years at least. But, given this stock’s forecasted dividend cover is over still three, I do have confidence that the company can continue to reward shareholders. Perhaps there will be cuts. But given Shell’s solid balance sheet and track record, I feel reassured that I have years of dividend payments ahead of me from this stock as a patient, long-term investor.
Small-cap dividend stock
I have to admit I had not heard much about RWS Holdings (LSE: RWS) before. It works with clients to make sure their content, ideas, and brands and clearly, sensitively, and legally communicated and registered across different languages and cultures. In a globally connected world, this sounds like a useful service to provide.
There are risks from the rise of free AI language models which could in theory replace some of the group’s functions. But it has developed its own offering. And there is a trend away from globalisation. That might be a headwind going forward as well. But I would wager that although manufacturing might shift homewards, companies will still want to market their products globally.
Perhaps my concerns are unfounded. The company’s annual revenue growth of 36% over the last five years suggests that it is services are seeing increasing demand. That growth and solid margins have enabled the company to pay an increasing dividend since 2005. Its earnings are forecasted to grow by 8% in each of the next two years. Combining that with a forecasted dividend cover of over two, plus low leverage and RWS Holdings forecasted dividend yield of 4.4% looks like a fairly safe bet.
