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Revealed: The Motley Fool’s Top 3 Dividend Shares for 2021

The Motley Fool’s Top Dividend Stock for 2021 (and 2 bonus picks)

Thanks for taking the time to access my report. My name’s Edward Vesely, and I’m the lead advisor of one of Australia’s most popular stock picking services, Motley Fool Dividend Investor.

Very soon you’ll receive your first issue of Take Stock. It’s full of vital information and investment ideas that I believe will help you grow, and when necessary, protect your wealth. I recommend you give it a good read. It’ll only take you a few minutes to read each issue, but it could prove to change your future drastically.

I think there’s never been a more critical time to be getting unbiased, professional insight into the stock market and economy. Earlier this year, the Covid-19 crisis had seen share markets fall of 30% in the space of a few weeks after a steady rise throughout 2019 and early 2020. Despite these across-the-board falls — and subsequent gains since March — some investors could still be owning the wrong shares at the wrong time, shares that fail to sustain their share prices once the crisis completely passes.

The good news is, we’re confident there are still hidden gems out there that have the potential to hand you substantial gains and income – even if the market continues to go south. But the question is, where do you find them?

That’s where I come in. Today, I’m going to reveal to you our top dividend play for 2021 (and beyond). As a thank you for being a loyal reader, we’ll also throw in two “bonus picks” (who we believe are also fantastic options for dividend investors) absolutely free.

Not only that, but I’m also going to show you how you can access all of my other top dividend BUY recommendations inside my exclusive Motley Fool Dividend Investor service. If you’re looking for a wealth of NEW dividend investing ideas beyond the “usual suspects” like banks, Woolies and Wesfarmers, look no further.

But before I get to that, let’s review my top dividend share for the coming 12 months.

Our top dividend pick: Dicker Data (ASX: DDR)

Dicker Data is a wholesale distributor of hardware, software and other related products, serving more than 5,000 Information and Communication (ICT) resellers each year. The IT/software manufacturers and vendors that are eager to access this portfolio of customers include many big names that you’re likely to recognise — companies such as Honeywell, HP, Fujitsu, Sony and Western Digital, for example. Given the breadth and growth of Dicker Data’s distribution network, it’s not surprising that the company has been able to continue attracting ICT vendors to its fold.

In the first half of 2020, 10 new vendors were added to the 15 that came on board in 2019, accounting for incremental revenue of around $26 million. Sales from existing vendors grew at a 15% clip and, with these sorts of growth figures, it’s not a surprise to see that Dicker Data’s market share has increased markedly in the last decade or so.

Between 2010 and 2013, Dicker Data grew its share of the industry pie from 5% to 8%. The savvy acquisition of Express Data in 2014 demonstrated a relentless focus on improving its value proposition and the ability to shift quickly when market preferences change. Significantly, this maintained strong relationships with all of Dicker Data’s clients; we were pleased to see that exceptional revenue and profit growth has continued well into 2020.

Why We Like Dicker Data

Despite (or, because of) the Covid-19-caused lockdowns, the company recently announced its revenue for the first half of 2020 increased by 18% – a touch above $1 billion — with net profit before tax (NPBT) rising 30% to $42 million. It’s also pleasing to see that this level of performance has continued right through to September.

These are reliable results, but it’s not just the extent of improvements in 2020 that has caught our eye. It’s been a marvellous long-term generator of increasing profits over several years, which has led to an ever-rising fully franked dividend — paid quarterly. The 35.5 cents it paid in dividends for the trailing twelve months (inclusive of the 1 December 2020 dividend) provides for a dividend yield of 3.4% at the current price. Given its performance to date, however, we think it’s likely that the dividend will continue to increase from here.

Additionally, it’s not hard to notice the regular buying of shares on-market by insiders. Throughout 2019, and through 2020, key senior staff and directors have continued to top up their holdings. Whilst this doesn’t guarantee performance, we’re pleased that senior management is not just tagging along for the salary but, instead, is continuing to add to their ownership stakes in the company. It’s this sort of shareholder alignment that we like.

Risks and When We’d Sell

A critical risk is the level of debt currently on the balance sheet. As of 31 December 2019, the Debt to Equity ratio sat around 1.37 times, with total debt up slightly from the balance in 2018. But we’re pleased to see that, from the period to 30 June 2020, this ratio has reduced to 0.57 with a concomitant increase in its ability to meet its interest bill on the back of improving cash flows. Still, whilst we believe that the balance sheet is manageable, there’s a risk that its $90 million debt burden could negatively affect it if sales don’t meet expectations or there’s a poor management of cash flow.

Another critical risk to keep your eye on is its customer concentration. Its top 5 vendors account for 57% of its sales, but it’s been good to see that this figure is well down on 90% from 2012. Therefore, losing any of these critical vendors would have a significant impact on company revenue. However, Dicker Data continues to treat vendor diversification as a crucial objective for future years but we’d be concerned if its efforts in diversification came to a sudden halt or, worse, reversed. So far, its record has been good, but we’ll continue to keep an eye on this in future periods.

The Foolish Bottom Line

Dicker Data has proven itself to be a very well run company, having demonstrated its ability to perform in a range of economic conditions. With increasing scale, an outstanding record of paying increasing dividends and high inside ownership, we’re confident that Dicker Data will be a neat fit for most income-focused portfolios.

Top dividend runner up #1: Bapcor (ASX: BAP)

Bapcor is primarily a trade-focused auto aftermarket parts business with operations in Australia, New Zealand and Thailand.

As at 30 June 2020, the company owned 186 trade stores around Australia, another 73 across the Tasman, and has plans to add between 10 and 12 more per annum over the next five years. Unlike most retailers, however, these stores aren’t located on busy street corners; they’re conveniently located around nearby workshops, allowing them to deliver the parts required by mechanics quickly.

When a person’s car runs into maintenance issues, they don’t have a choice: they have to get it repaired right away, which makes for steady business for Bapcor. Better yet, a recession could be good news for Bapcor: as customers put off buying new cars, they must spend more on keeping the ones they own running. In the trade business, Bapcor’s customer is the mechanic, not the end-user (the driver). That gives Bapcor a lot of pricing power and is one of the reasons it has managed to grow its same-store sales (SSS) at an average of 4% per annum over the past five years (pre-Covid). Since the pandemic, SSS has increased to 6% due to the increased demand for second-hand vehicles.

The remainder of Bapcor’s income comes from its retail (predominantly Autobarn) and specialist wholesale operations, which together accounted for 19% of revenue and 17% of earnings from continuing operations for the 2019-20 financial year.

Bapcor is led by CEO Darryl Abotomey, who has pioneered the company’s growth since 2011 (and led its IPO in 2014). He has recently signed a new contract extending his tenure in the top job until April 2022. He has approximately $10.6 million of personal shares in the company to ensure his interests align with our own.

Risks and When We’d Sell

We think Bapcor’s trade business is relatively protected from (NASDAQ: AMZN), due to its strong relationships with mechanics. But its retail network is susceptible, as well as to other competitors. This weakness has the potential to impact Bapcor’s overall performance, given its retail segment accounts for around 19% of its revenue and 17% of its operating earnings.

Bapcor has done a tremendous job integrating acquisitions to date, but there is always a risk that won’t continue. An ill-timed acquisition, or paying too much, could be disastrous for the group.

The Foolish Bottom Line

Bapcor provides investors with resilient earnings, growth potential and a dividend yield of 2.3% fully franked (at the time of writing). We think it’s a good time to drive Bapcor into your portfolio.

Top dividend runner up #2: Brickworks  (ASX:BKW)

Despite its name, Brickworks these days is more of an investment conglomerate with brick manufacturing itself making up only 26% of its total investments.

The remaining asset exposure of the company is its investment in Washington H. Soul Pattinson (ASX: SOL) — 53% of the total — and its property investments, making up 21%, mainly consisting of a 50/50 joint venture with Goodman Group (ASX: GMG).

Given this, we like the levels of diversification that an investment in Brickworks can bring to a portfolio. Brickworks’ ongoing dividend stream is not only underpinned by the dividends it receives itself from the afore-mentioned Soul Patts but it provides for a great deal of reliability and consistency in dividend payments.

Just consider this: the last time that Brickworks had to cut its dividend was back in 1975. That is, In the previous 45 years, the dividend has been maintained or steadily increased, helping to keep its shareholders one step ahead of the costs of living and protecting the value of their investment.

Brickworks is also looking to add value to its operations in brick manufacturing and property. We’re pleased to report that its US brick manufacturing is poised to participate in the consolidation of the US brick market. With its focus being specialty, of premium high-end bricks, we’re confident we’ll see further good progress in this market.

Its joint venture with Goodman Group, too, is off to a good start with the pre-commitment of both Coles (ASX: COL) and Amazon (NASDAQ: AMZN) to long-term tenancies, which helps to boost the value and income stream of its investments.

All up, its steady hand by management, and a continued focus on the very long term has meant that it has delivered low double-digit growth (inclusive of dividends) for its owners over the last 20 years.

Risks and When We’d Sell

Although brick manufacturing is 26% of the total, this doesn’t mean it’s immaterial. Any downturn in the economy for extended periods, leading to reduced demand for materials in house construction, for example, could see the business suffer, even if temporarily. The vital thing to note is that brick manufacturing is cyclical, which is something that won’t go away. There will, therefore, be periods of high and low demand, affecting the profitability of the overall business. If you’re to be an investor in Brickworks, this is something you need to know upfront.

As a follow on from the above risk, the introduction of competitive light-weight building materials that can be manufactured more cheaply remains a possibility in the longer term.

Finally, Brickworks’ almost 40% stake in Soul Patts means that if there were to be any significant adverse changes at Soul Patts, this would have a direct flow-on effect to Brickworks shareholders. To date, this hasn’t proven to be a negative, but it’s essential to consider how dependent Brickworks is on its Soul Patts investment.

The Foolish Bottom Line

The long-term track record of Brickworks has come about because of management’s steady hand at the wheel, and always making investments with the view that they’re going to be held for decades. We suggest you do the same. The current yield is 3% which, grossed up to account for franking credits, amounts to around 4.3%. This yield isn’t a bad return in what remains a very low-interest-rate environment. When we combine this with management conservatism, we see Brickworks as a compelling long-term investment idea for most income-focused portfolios.

The Recap

To recap our top dividend stock for 2020 is Dicker Data (ASX: DDR) and our two runners up, which could be fantastic options within a diversified portfolio are Bapcor (ASX: BAP), and Brickworks  (ASX: BKW).

We hope these three dividend shares help you on your way to becoming Smarter, Happier and Richer, with the first steps of a well-diversified portfolio and a fantastic year ahead of investing.

To your dividend wealth,

Edward Vesely
Lead Advisor, Motley Fool Dividend Investor

As of 11 November 2020.

Ed Vesely owns shares of Dicker Data and Bapcor. The Motley Fool Australia owns shares of Dicker Data, Bapcor and Brickworks. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. For more information about The Motley Fool see our Financial Services Guide. All returns cited are hypothetical and based on the percentage change between the stock price at the time of recommendation and the current or sell price (if the position has been closed) at the time of publication. Brokerage, taxes and any other associated costs are not taken into account. Please remember that investments can go up and down. Past performance is not necessarily indicative of future returns. Performance figures are not intended to be a forecast and The Motley Fool does not guarantee the performance of, or returns on any investment. Any money back guarantee is strictly limited to the subscription price paid for the product.

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