One of the good things that can be said for the FTSE 100, and to a lesser extent the UK stock market as whole, is that it has a lot of dividend stocks. High yields (pandemic aside) tend to be a feature of the energy, commodities and banking-heavy UK market. At the time of writing the FTSE 100 average dividend is just under 3.5%. That high level of income is often seen as attractive when interest rates, for now at least, remain at record lows just above zero.
I like the look of these two dividend stocks in particular as they have the potential for dividend growth, offer good yields and should be able to grow.
A top dividend stock
While there can be little doubt the prospect of rising interest rates could hit demand for mortgages and new homes, I like the look of housebuilder Redrow (LSE: RDW). Recently the group said that 2022 full-year results were expected to be close to pre-Covid levels. Redrow said the value of net private reservations in the 19 weeks to 5 November was 2% higher year-on-year at £672m. This positive update is consistent with statements from its peers.
Investors are perennially concerned about the availability and affordability of mortgages. That’s one of the reasons why housebuilders’ shares seem to always be cheap.
But Redrow looks to be a very solid dividend stock. The current yield is around 4%. In the period preceding the pandemic, dividend growth was strong and it’s now bouncing back. This combination of dividend yield and dividend growth is attractive.
I already have Persimmon shares but could be tempted to buy Redrow as well.
A more volatile option
CMC Markets (LSE: CMCX), the spread-betting company, operates in an inherently more volatile market than Redrow. Yet I like the company. It has operations overseas, most notably in Australia where it has significant market share as a stockbroker. The founder-owner of CMC Markets holds a significant stake, so the interests of management and ordinary shareholders are well aligned.
When it comes to the dividend, it’s currently offering an eye-watering yield approaching 12%. I think this should normalise soon as the share price will likely recover from a sell-off (the shares have been falling against tough 2020 comparisons). CMC Markets does tend to be a high-yielding share. The issue is it operates in an industry where earnings can be unpredictable so it’s not the most consistent by any means for dividend growth. Overall though, I like the company and I think it now looks cheap and offers a high income. I might very well buy.
It’s worth remembering that dividends are just a part of total return. They shouldn’t be separated from growth because if a share price falls heavily no amount of dividend can realistically make up the difference. That’s why I want to concentrate on quality dividend stocks like Redrow and CMC Markets. I’d be happy at the end of the day to add both to my investment portfolio.
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Andy Ross owns shares of Persimmon. The Motley Fool UK has recommended Redrow. 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.
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