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In my opinion, the best dividend stocks to buy for passive income share two qualities. First, they regularly generate a good (but not excessive) amount of cash for investors. Second, they have excellent track records of growing these payouts every year (or almost every year).
In my experience, many of the companies that meet both criteria tend to be pretty boring. And that's fine by me! The goal here is consistency, not enthusiasm.
Let's look at a pair I would consider purchasing if creating a second income was my primary goal.
Trusted payer
coat's (LSE:BOY) is an example of a company that I would back to continue to increase its cash payouts in the future. Why? Because this FTSE 250 IndexThe publicly listed heat treatment and thermal processing services provider has built up an excellent track record in this field over many years. It has even earned the occasional special dividend along the way.
Of course, just because a company has invested money in its investors in the past is no guarantee that it will continue to do so, especially if operations suffer a setback.
Bodycote is no exception. It is worth noting that the recent interim results for the first six months of 2024 mentioned “challenging” market conditions for its Automotive and General Industrial (AGI) division. As a result, the company needed to take “a series of decisive measures to balance costs and capacity with short-term demand“.
Don't be greedy
On a more positive note, the company made no changes to its full-year outlook. This makes me think that the 3.7% dividend yield looks safe. In fact, analysts suspect that the payout will be more than doubled by expected earnings.
Some may scoff at such a high average return when there are other companies offering nearly three times as much, but I would rather receive a smaller but increasing payout than never Get a better one. What seems too good to be true often is.
5% yield
FTSE 250 listed asset manager partner Bones of Rath (LSE:RAT) is another deadly and boring dividend demon that has been increasing the money it returns to investors for years.
I find this impressive, especially since it operates in a sector where sentiment can change quickly based on macroeconomic headlines. The dividend yield, which is just over 5%, is also considerable and looks like it will be comfortably covered by earnings.
One potential hurdle is last year's merger with Investec Wealth & Management. While it appears to have gone well, it may take some more time to truly judge whether this move really benefited shareholders.
Cheap to buy
The valuation doesn't seem overblown, though. The stock is currently trading at a very reasonable 11 times expected earnings for fiscal 2024. That could even prove to be a bargain over time if July's interim results are anything to go by.
In a sign that risk appetite is recovering, Rathbones reported a 3.4% increase in its funds under management and administration during the first six months of 2024.
If and when confidence returns a lot —Perhaps after a succession of interest rate cuts both here and in the US—I wonder if I could see a nice positive return on top of those dividend payments if I bought now.
