The Motley Fool

A Special Report

Revealed: The Motley Fool’s Top 3 Dividend Shares for 2020

The Motley Fool’s Top Dividend Stock for 2020 (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 drastically change your future.

In fact, I think there’s never been a more critical time to be getting unbiased, professional insight into the stock market and economy. Right now, as we all know, the Covid-19 crisis has seen share markets fall 30% or so in the space of a few weeks after a steady rise throughout 2019 and early 2020. Despite these across-the-board falls, investors can still be caught out owning the wrong shares at the wrong time, shares that fail to come back at all once the crisis passes.

The good news is, we’re confident there are still hidden gems out there that have the potential to hand you solid 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 2020 (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, 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 that serves more than 5,000 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 2019, 15 new vendors were added, accounting for incremental revenue of just under $30 million, and sales from existing vendors grew almost 17%. With these sorts of growth figures, it’s not a surprise to see that Dicker Data’s market share has grown markedly in the last decade or so. 

Between 2010 and 2013, Dicker Data grew its share of the industry pie from 5% to 8%. But with its savvy acquisition of Express Data in 2014, a relentless focus on improving its value proposition, an ability to shift quickly when market preferences change and, importantly, maintaining strong relationships with all of its clients, we were pleased to see that it delivered another exceptional year of revenue and profit growth in 2019.

Why We Like Dicker Data

Despite — or, because of — the Covid-19-caused lockdowns, the company has recently announced that its revenue for the first half of 2020 has increased by another 18%, giving it enough confidence to estimate that profit before tax will be up around 25%. Suffice to say, this is extremely pleasing.

These are solid 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 a number of years, which has led to an ever-rising fully franked dividend — paid quarterly. The 30.5 cents it paid in dividends for the trailing twelve months provides for a dividend yield of just under 4%. 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 all the way 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 are not just tagging along for the salary but, instead, are 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 key risk is the level of debt currently on the balance sheet. As at 31 December, 2019 the Debt to Equity ratio sat around 1.36 times, with total debt up slightly from the balance in 2018. Importantly, however, its ability to service that debt has increased substantially in the last year, with its ability to meet its interest bill increasing on the back of improving cash flows. Still, whilst we believe that the balance sheet is manageable, there’s a risk that its debt burden could negatively affect it if sales don’t meet expectations or cash flow is managed poorly.

Another key risk to keep your eye on is its customer concentration. Its top 5 vendors account for 57% of its sales, but it’s been pleasing to see that this figure is well down on 90% from 2012. Therefore, losing any of these key vendors would have a significant impact on company revenue. However, Dicker Data continues to treat vendor diversification as a key 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 going forward.

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, a very good record of paying increasing dividends and high inside ownership, we’re confident that Dicker Data has a place 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 31 December 2019, the company owned 184 trade stores around Australia, and another 72 across the Tasman, and has plans to add between 10 and 12 more per annum over the next 5 years. Unlike most retailers,  however, these stores aren’t located on busy street corners; they’re conveniently located around nearby workshops, allowing them to quickly deliver the parts required by mechanics.

When a person’s car runs into maintenance issues, they don’t really have a choice: they have to get it repaired right away, which makes for steady business for Bapcor. Better yet, a recession can actually be seen as 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 at an average of 4% per annum over the past five years.

The remainder of Bapcor’s income comes from its retail (predominantly Autobarn) and specialist wholesale operations, which together accounted for 51% of revenue and 45% of earnings from continuing operations in the first half of FY 2020.

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, and has approximately $9 million of his own shares in the company to ensure his interests are aligned 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 does have the potential to have an impact on 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 simply 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 2.8% fully franked (at the time of writing). It’s time to drive Bapcor into your portfolio.

Top dividend runner up #2: Aurizon Holdings  (ASX:AZJ)

Aurizon is a rail freight company and is an important component of many miner and agricultural company supply chains helping to transport their commodities to port for export to overseas markets. There are customers in Australia too, but these are in the minority with most products transported straight to port to be loaded onto ships.

Aurizon’s three major revenue-earning divisions are Coal, Bulk and Network.

The transport operations of its Coal and Bulk divisions (above rail), respectively, connect its customers’ mines/farms in Queensland, New South Wales and Western Australia so that product can get to either its domestic customers or commodity export terminals.

Its Network division (below rail) consists of approximately 2,670 kilometres of the Central Queensland Coal Network (CQCN), an open-access multi-user track network connecting four major coal systems, and Queensland’s Bowen Basin coal region.

The CQCN is the largest coal rail network in Australia, operated by Aurizon’s fully-owned subsidiary Aurizon Network Pty Ltd which leases the infrastructure from the State of Queensland on a 99 year lease at the rate of $1 per year.

The price Aurizon can charge its customers is set by the regulator — the Queensland Competition Authority (QCA) — but it’s good to know that it recently allowed Aurizon the ability to improve its returns via an Access Undertaking that was also agreed to by its customers.

The amount it can earn has just increased from 5.9% to 6.3% on 1 July 2020 — a 6.7% increase. This not only removes a great deal of regulatory uncertainty, but enhances its earnings prospects for the next few years at least.

Risks and When We’d Sell

Although Aurizon isn’t exposed directly to falling commodity prices, if there was to be an extended period of low or falling prices being received by its customers, this could eventually have an impact on production volume and hence Aurizon’s haulage volumes. The outlook for Australian coal production and exports over the next few years is already expected to grow fairly slowly over the next few years so any further downturns in commodity markets could have a serious impact on Aurizon’s ability to sustain its dividend.

There are also more challenging approval processes and stringent restrictions on coal mine financing due to climate concerns, which could feed into greater uncertainty for longer-term demand, making it more difficult for Aurizon’s customers to make investment decisions. Any adverse decisions made by customers that lead to a closing or mothballing of mine sites would most likely be a negative for the share price.

The Foolish Bottom Line

Aurizon’s advantages come about from its strong market position, and, indirectly, continued strong demand in Asia for many of the commodities it moves over its network. With a solid dividend of 5.2% — franked to 70% — and the promise of slow but steady growth over time, Aurizon looks like a good buy for yield-hungry investors at the current price.

The Recap

Just 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 Aurizon Holdings  (ASX:AZJ).

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 06 July 2020.

Ed Vesely owns shares of Dicker Data and Bapcor. The Motley Fool Australia owns shares of Dicker Data and Bapcor. 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.

© Copyright The Motley Fool Australia Pty Ltd. 2010 – 2019. All rights reserved.