As the yield hunt intensifies on the back of the RBA's decision to cut benchmark cash lending rates to just 1% it's getting harder to find investment grade companies paying strong dividends on attractive valuations.
The big danger with 'dividend investing' today is that if the rate cutting cycle turns as quickly as it arrived then investors buying up shares on historically low yields and high multiples like Transurban Group (ASX: TCL) or Sydney Airport (ASX: SYD) are going to be left underwater.
While other companies I named regularly as good dividend bets in 2018 and over the first half of 2019 such as Dicker Data Ltd (ASX: DDR) have raced 50% – 100% higher over the past year. This is probably because income seekers are bidding them up on the back of recommendations from powerful retail brokers such as Morgans or Bell Potter.
I'd remind anyone looking to shares for income that shares are risk-on assets and sticking your head in the sand over this to psychologically anchor to dividends as a safety net will generally be a mistake.
Or to think of it another way, I wouldn't buy shares in any dividend-paying company if I wasn't happy to theoretically buy it if it didn't pay a dividend at all, but just bought back shares instead.
Keeping this in mind I'm happy to name two businesses I'd buy today if I were focused on income ,as I also believe (rightly or wrongly) that they both have a good chance of beating the market over the next 3-5 years due to some reasonable valuations.
Flight Centre Travel Group Ltd (ASX: FLT) has a strong long-term track record of revenue, profit and dividend growth. It's also founder led had a $358 million net cash position as at December 31 2018 and still pays a relatively low amount of its profits out in dividends.
Thanks to its strong cash position it recently paid a special dividend of 60 cents per shares and profit-based dividends over the past year total $2.56. On that basis it yields a fully franked 5.8%, although the final dividend is likely to be a fair bit lower with FY 2020's results uncertain it's still likely to provide a cash-thumping yield. It also trades on 17x analysts' estimates for earnings per share around $2.51 in FY 2019.
Event Hospitality & Entertainment Group Ltd (ASX: EVT) is the hotels and cinemas business that also has an excellent long-term track record of profit and dividend growth. It recently agreed a deal to sell its underperforming German cinemas business, which leaves it free to focus on growing its local Australian cinemas business. However, its most attractive assets are its hotels businesses in particular under the QT brand and at its popular ski resort offerings. It also owns the Rydges and Atura Hotel brands.
It paid 51 cents per share and 52 cents per share plus full franking credits over the past two financial years and is likely to pay 52 cents per share in total over FY 2019 to place it on a 4.2% yield at today's price of $12.48.
