UK investors love dividends. It’s not hard to see why – these cash payouts are a great source of passive income. Recently, I scoured the market for the best dividend stocks for investors to buy in June. Here’s a look at two names I came up with.
Rising payouts
Let’s start with FTSE 250 firm Softcat (LSE: SCT). It’s a leading provider of IT solutions.
This stock looks like a great long-term investment, to my mind.
Should you invest £1,000 in BAE Systems right now?
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For starters, the company is benefiting from one of the most powerful trends in the UK today – digital transformation. This is leading to strong growth in revenues and earnings.
Secondly, on the back of this top- and bottom-line growth, the company is increasing its dividend payout rapidly. Over the last three years, Softcat has increased its ordinary payout 60% from 14.9p to 23.9p per share. There are not many companies across the FTSE 350 producing that kind of dividend growth right now.
Plus the group has a history of paying ‘special’ dividends. Last financial year, for example, it handed out an extra 12.6p per share by way of a special distribution. The year before, it was 20.5p per share.
These extra payouts have bumped the yield up substantially. For example, last year’s payout of 23.9p equates to a yield of around 1.7% at today’s share price. Add in the 12.6p special dividend, however, and the yield rises to 2.6%.
On the downside, this stock’s valuation is relatively high right now. Currently, the forward-looking P/E ratio is about 24, which adds risk.
I don’t see this valuation as a deal-breaker, however, given the company’s long-term growth prospects. I reckon this stock has the potential to provide strong overall returns in the years ahead.
A great buying opportunity
The other stock I want to highlight today is FTSE 100 constituent BAE Systems (LSE: BA.). It’s a major defence and security company.
BAE Systems shares have had a great run over the last two years thanks to the high level of geopolitical tension globally. However, recently, they’ve experienced a pullback, falling from around 1,020p to 940p.
I see this as a great buying opportunity. Not only has the pullback pushed the yield here above 3% but it has also reduced the stock’s P/E ratio from above 17 to below 16. I think that’s a very reasonable valuation for this company in light of the tense geopolitical environment right now.
Looking beyond the supportive backdrop, one thing this stock has going for it is that the company is buying back its own shares. Earlier this month, it told investors that it was initiating the third tranche of its current buyback programme. This will see it buy back £500m worth of stock between 1 June 2023 and 24 July 2024.
Generally speaking, buybacks tend to boost a company’s earnings per share. This, in turn, can boost its share price over time.
Of course, the risk is that governments curtail spending on defence. I can’t see this happening any time soon. However, we can’t rule out such a scenario.
