When you are out on the hunt for a good dividend stock, you look for a couple of things. First, you see how a stock's yield compares with its industry peers. They have the same market conditions and run similar businesses, so that may be a way to separate the winners from the rest.
Next, you want to know if the dividend is stable. If it drops irregularly or is trending down, then a high dividend yield may give a false signal. A stock that falls in price can maintain an attractive yield if the dividend falls along with it. Can a weakening company keep on paying a high dividend?
Lastly and probably most importantly is how the company increases the dividend each year. Without the growth, it would be like a bank account that pays a few percentage points of interest yearly. Ideally, we want the dividend to grow each year. Over many years, just the rate of return on dividend income can rise greatly based on the initial share purchase price.
Here are three companies that have good dividends and good track records for dividend growth.
Westpac Banking Corp (ASX: WBC)
One of the Big Four banks, it just declared an interim dividend of 90 cents per share, up from 86 cps on the interim a year ago. It currently has a dividend yield of 5.2%.
It has raised annual dividends every year since 2009. Like the other major banks, it has reached a new all-time high recently.
FlexiGroup Limited (ASX: FXL)
The consumer finance and leasing service provider is set up as the company to get personal purchase financing through at big retailers like Harvey Norman Holdings Ltd (ASX: HVN).
For the first half, it had an interim dividend of 8 cps fully franked, an increase of 14% on the previous corresponding period. For the last six years, annual dividends have been steadily rising thanks to the business growth. Currently it has a 4% dividend yield.
BHP Billiton Limited (ASX: BHP)
"The Big Australian", the largest company on the ASX by market capitalisation may not have the biggest dividend yield at 3.2%, but its annual dividends over the past 10 years have risen in all but 2011.
Mining is a cyclical industry, so managing to raise dividends is a great achievement. The company is at present considering restructuring its business. This could result in higher earnings, which lead to more dividend growth. In addition, it may be an opportunity for shareholders to receive a special dividend as non-core assets may be sold.
Foolish takeaway
Only long-term investors can regularly benefit from dividend increases, so sustainable dividend growth is an important thing to consider when building your portfolio.
