The great thing about hunting for dividend shares is that it can be a straightforward process.
To me, the examination of a company’s dividend yield and its record of shareholder payments can reveal so much about a business.
For starters, the presence of a decent yield often goes hand in hand with good value. Although that’s not always the case. Sometimes a high yield is a warning sign that dividends may soon face the chop.
But a strong record of multi-year dividend payments suggests a healthy enterprise. And that’s particularly true if the payment has been rising a bit each year.
Supportive financial indicators
Well-known successful investor Lord John Lee pays attention to the dividend decisions made by company directors. He reckons they reveal much about the management team’s confidence in the outlook for a business.
And it takes cold hard cash to pay dividends to shareholders. So, in many cases, dividends prove that profits are more than just a note scrawled in the accounts. And incoming cash flow is likely to be backing up those outflows to shareholders.
Identifying a robust record of rising dividends can also lead to the discovery of steady multi-year increases in revenue, earnings and cash flow. And once-outperforming fund manager Neil Woodford enjoyed success by starting with a company’s dividend. He looked for an attractive yield and good prospects for the dividend to grow in the years ahead.
Meanwhile, we’ve just endured what could be described as a punishing few years for businesses and investors. And that situation was an environment that stress-tested businesses. So now we can really see what they’re made of. And I can’t think of a better way to do that than by examining their dividend records — at least in the first place.
A resilient dividend record
But my research has taken me into some perhaps surprising sectors. For example, I like the look of Keller (LSE: KLR). The company describes itself as the “world’s largest” geotechnical specialist contractor. And it provides advanced foundation and ground improvement techniques for the “entire” construction sector “across five continents”.
Before looking, I’d assumed that Keller’s business would be cyclical and therefore the dividend record would be patchy. But shareholder payments have held up well. In 2016, 17 and 18, the company raised its dividend. And in 2019, 20 and 21, it held it flat. But Keller didn’t end up in that big pile of companies that stopped its shareholder payments through the pandemic. In 2022 the dividend rose again. And City analysts predict another increase this year.
Meanwhile, in November, the directors reported strong trading and delivered a positive outlook statement. It seems that the business truly is displaying its resilience.
Yet despite the good news, the valuation looks modest. With the share price near 802p, the forward-looking dividend yield is around 5% for 2023.
Keller has a fair old pile of debt to keep an eye on. And it’s always possible for trading to deteriorate in the months ahead. But even with the risks, I’m tempted by this dividend-paying stock now. And if I wasn’t already fully invested, I’d dig in with deeper research.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.