When looking for dividend income, the conventional wisdom among investors is to scan for stocks that offer high dividend yields. But with dividend payout cuts looming among the big banks, investors should start thinking of alternative methods to screen for income stocks.
In order to avoid being stuck in a dividend trap, it's important that investors look for stocks that have potential earnings that can sustain and grow dividends payouts over the long-term. Characteristics of this include a company that has a steady track record of profitability and a strong dividend policy.
Here are 3 companies that I think have the potential to become quality-income producers over the long term.
Noni-B Limited (ASX: NBL)
Noni B is a fashion retailer that operates a number of prominent brands such as Rockmans, Millers and Rivers. Earlier this year, the company saw underlying earnings before interest, tax, depreciation and amortisation rise 22% to $45.5 million for FY19. Despite tougher retail conditions Noni B saw revenue for the full year grow to $881.9 million from $372.4 million the year prior. Despite having a market capitalisation of $240 million, Noni B offers a fully franked dividend of 5.5 cents, giving it a 10% yield.
Australian Pharmaceutical Industries (ASX: API)
Australian Pharmaceutical Industries (API) owns the Priceline Pharmacy chain and Clear Skincare clinics, selling cosmetics and beauty items in addition to government-subsidised drugs. API saw earnings before interest and tax jump 14.1% to $94 million for FY19, with revenues increasing 0.4% to $4 billion.
API has a strong competitive advantage, stocking exclusive products for women not available elsewhere. In addition, the company looks to expand its Clear Skincare clinics from 44 to 52 by October 2020. API currently pays total dividends of 7.7 cents, giving the company a 5.7% yield.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
Soul Pattinson is already a quality income producer with the company delivering its 19th consecutive year of rising dividends earlier this year. Soul Pattinson is an investment house business, owning 25.3% of TPG Telecom Ltd (ASX: TPM), 44% of Brickworks Limited (ASX:BKW) and 50% of New Hope Corporation Ltd (ASX: NHC).
Despite reporting a decrease in statutory net profit earlier this year, Soul Pattinson will pay dividends of 57 cents per share for the full-year. The company has paid a dividend since listing in 1903 and has lifted its interim and final dividend each year since 2000. This performance underlies the strong diversification and growth prospects of Soul Pattinson.
Should you buy?
The 3 companies I have listed should serve as an example of what investors should look for when choosing a company that can provide long-term income. The common characteristics they share include a competitive advantage, consistent history of earnings and the ability to grow earnings.
