Companies with consistently strong profit margins show their business is in some way specialised or high in demand. Premium names can attract premium prices and sought after services keep cash flows up.
Coupled with growing dividends, investors get a combination of good future prospects and near-term portfolio income.
Here are four stocks that have both stable dividend growth and high profit margins. Together they could make up a diversified portfolio or be good single additions to an existing one.
ARB Corporation Limited (ASX: ARP) has rewarded shareholders with dividend per share growth of about 12% in 2013. This is close to the five-year and 10-year compounded averages of about 13%. Its off-road FWD vehicle parts and accessories business has stayed popular over the past ten years.
2013 net profit margin was 14.5%. It manufactures parts overseas to save on cost and the Aussie love for off-road travelling and camping drives sales.
TPG Telecom Ltd (ASX: TPM), the internet service and telecommunications provider, had a remarkable 36.4% rise in dividends per share in 2013, from 5.5 cents per share to 7.5 cps. It, too, has a strong history of increasing dividends in the past 5-10 years.
Its 20.4% net profit margin in 2013 shows that even in a highly competitive ISP industry, controlling costs while increasing business can make attractive earnings.
Nick Scali Limited (ASX: NCK) has benefited well from the rising housing market as home owners purchase furniture for their residences. Revenue of the home furnishings retailer has risen steadily over the past five years and in 2013 dividends per share went from 8 cps to 12 cps.
Net profit margins are usually about 11%-12%. With the increase in housing construction that builders are experiencing now, the company can possibly look forward to higher sales on its premium furniture.
CSL Limited (ASX: CSL) is the largest ASX-listed biopharmaceutical company with a market capitalisation of $32.6 billion, but instead of being a company that slowly advances because of its great size, solid earnings led to dividends per share rising 32.5% in 2013. Its 10-year compounded annual growth rate for dividends is 27.3%, so its track record speaks for itself.
It achieved a 23.8% net profit margin in 2013, in line with previous years which had 20%+ margins.
Foolish takeaway
Stocks like these can help investors build up a solid base of earnings and pleasing share price gains over the long-term.
