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Dividend Growth Makes Me Want To Buy Diageo plc

Diageo (LSE: DGE) (NYSE: DEO.US) is a company that I have held shares in during my career as a private investor, and I’m now thinking of adding it to my portfolio once again.

A key reason for this is the high dividend growth rate that Diageo has both experienced over the last few years and is set to experience in future.

Indeed, dividend growth rates have become a lot more relevant to me (and I’m sure to you) because of the historic low interest rates and the nagging challenge of obtaining an income that is higher than inflation, so that the spending power of my capital is not being constantly eroded.

So, Diageo’s track record on dividend per share increases in recent years gives me comfort, with the company increasing them in each of the last four years. Furthermore, dividends per share have increased at an annualised rate of 7.5% over the last three years, showing that Diageo could be a key stock for income-seeking investors like me.

In addition, Diageo is forecast to increase dividends per share by a whopping 8%+ over the next 12 months, showing that the company remains committed to passing earnings growth on to shareholders in the form of a higher dividend.

Of course, a growing dividend is not the only reason why I’m thinking of buying shares in Diageo.

I also think that now could present an opportune entry point, since sentiment has been slightly weak following the company’s Q1 update.

Although it was impressive, the update was marginally behind expectations, with emerging markets continuing to be volatile. However, I’m still confident of the company’s medium- to long-term outlook and I doubt that weak sentiment will continue for too much longer.

Therefore, buying now could be an effective way to ‘buy low and sell high’. In other words taking advantage of temporarily declining sentiment to buy at a lower price in the belief that the market will fall back in love with Diageo, at which time profits could be locked in and shares sold.

So, I’m keen on the idea of adding shares in Diageo to my portfolio because the company’s track record of dividend per share increases is very impressive and, furthermore, the forecast for the next 12 months is also very encouraging. In addition, I feel that weak sentiment won’t last and it could be a good opportunity to buy shares at a lower price than they deserve (in my view) to be trading at.

Indeed, Diageo made the final cut within The Motley Fool's exclusive report entitled 5 Shares You Can Retire On!

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> Peter does not own shares in Diageo.