As many advisors would have you believe, you should buy shares for one of two reasons: dividends or growth. I like to have both. Here are a few of my favourite stocks for strong dividends that also have great long-term potential for capital gains.
For income investors, dividend stability is extremely important. Dividend stability is a gauge of the company's track record in either upping, or continuing to pay a dividend year after year. If it lowers or stops paying a dividend it will greatly reduce the stability (which is percentage out of 100).
Challenger (ASX: CGF) is one stock that has a 100% track record with investors. Since it started paying its 5-cent dividend in 2005, it's never looked back. In FY13 it returned a 20-cent dividend to investors, which represents a 4% yield at current prices. Challenger is an exciting but modest financial company that should experience increasing revenues in the next 20 years as baby boomers enter retirement and more annuities are demanded.
As more and more countries experience booming middle class populations, food and other soft commodities will be demanded throughout the world. Tassal Group (ASX: TGR) pays a 3.5% dividend, has minimal debt and dividend stability of 90.8%. Tassal only reduced its dividend once during the fallout of the GFC, but its current return is as high as it's ever been and could well go higher as revenues grow.
What stock has a price to earnings of 11.7, year-on-year share price return of 37% and a 6.9% fully franked dividend? It's got to be Myer (ASX: MYR). Myer has, so far this year, impressed investors despite very poor consumer and business confidence. However with interest rates low and confidence returning, I'm expecting revenues for FY14 to show a significant improvement..
If a good company succumbs to 'market noise', then it could present itself as a great buying opportunity for savvy investors. For example, Cash Converters' (ASX: CCV) share price recently took a hit when the company announced it was facing a $40 million class action for alleged improper micro-lending. The company reassured shareholders by saying that "the action is based on a flawed proposition and will be defended". Cash Converters pays a 3.7% dividend and has solid long-term potential.
Finally, Metcash (ASX: MTS) — owner of IGA supermarkets — is a strongly diversified wholesale business that has competed against industry giants Woolworths and Wesfarmers' Coles. Metcash might be slightly more expensive in store, but it's not cheap when it comes to dividends. At current prices it pays a 28-cent fully franked dividend, representing a yield of 8%! Investors shouldn't expect an increase in the FY14 dividend as tighter margins and increased competition are being realised.
Foolish takeaway
At the Motley Fool, we have a simple investing ethos: buy good companies cheap and have a view for the long term. The above companies are my personal opinion of what I think are great dividend paying stocks, but if you want The Motley Fool's best income idea for 2013-2014 completely free, simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."
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Motley Fool contributor Owen Raszkiewicz owns shares in Metcash, Cash Converters, Myer, Tassal Group and Challenger.
