I’m searching for the best dividend stocks to provide me with a second income. It’s a quest that involves more than picking shares with the highest yield, which can be tempting for new investors.
I’m on the hunt for companies that look in good shape to grow dividends steadily over time. This way I can reduce (or even eliminate) the impact of rising inflation on my purchasing power.
Nobody knows what the future holds, and even companies with strong dividend growth records can suddenly disappoint. Shell raised the yearly payout every year since World War 2 until the pandemic smashed earnings in 2020.
Should you invest £1,000 in Grainger Plc right now?
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But some careful analysis can seriously improve an investor’s chance of growing their dividend income. This involves identifying stocks with a proven record of operational excellence in growing markets. It’s also important to find businesses that generate decent amounts of cash that they can then return to shareholders.
With this in mind, here are two shares from the FTSE 100 and FTSE 250 I’d love to buy to try and grow my passive income.
Grainger
Britain’s growing population means that demand for rental properties will steadily increase. This bodes well for Grainger (LSE:GRI), the country’s largest-listed residential landlord.
The company operates almost 10,000 build-to-rent homes. And with a development pipeline comprising another 5,000+ homes, it has ambitious expansion plans to supercharge profits growth.
The possible introduction of new rent reforms could bite into earnings here. But a long-term trend of rising rents means the outlook is extremely promising for investors.
Like-for-like rental growth sped up to 7.1% in the eight months to May. And occupancy of its privately rented homes rose to record levels of 98.7%. I’m expecting trading numbers to remain impressive given the weak outlook for homes supply.
As for dividend growth, City analysts expect Grainger’s annual payout to rise 9% this financial year. This results in a healthy 2.6% yield.
Halma
Safety equipment supplier Halma (LSE:HLMA) is one of the FTSE 100’s greatest dividend stocks, in my opinion. It’s lifted the annual payout by at least 5% for an astonishing 43 straight years.
And (perhaps unsurprisingly) City analysts expect the firm’s proud record to continue. A 7% hike is tipped for the current financial year, resulting in a 1% dividend yield.
Halma is a very cash-generative business. Not only does this allow it to pursue its ultra-progressive dividend policy. It also gives the firm the financial firepower to make acquisitions, giving long-term earnings a considerable boost.
Just last week the company spent £23m to acquire Australia’s Lazer Safe, a manufacturer of protection systems for press brakes. A net-debt-to-EBITDA ratio of just 1.4 times is well within target, and gives the firm ample room to grow dividends and keep making acquisitions.
The drawback with Halma shares is its high valuation. A forward price-to-earnings (P/E) ratio above 26 times leaves it vulnerable to a share price correction if trading suddenly worsens.
But encouragingly, the company has an excellent performance history. It has racked up a staggering 20 consecutive years of record profits. I believe rising safety standards across the globe should continue to power the FTSE firm’s earnings higher.
