Look back just a few short years and the difference between FTSE 100 blue-chip income-generating companies and low-dividend-growth candidates was as clear as day.

At this time back in 2014, Tesco (LSE: TSCO) was just about to announce a tasty dividend yield of 4.4%. Granted it had been unchanged for three years, but it seemed well covered — and even though earnings per share (EPS) had fallen for two years in a row, we really weren’t prepared for the carnage still to come.

A couple of months prior to that, ARM Holdings (LSE: ARM) had coughed up a mere 0.5% dividend, and that only got as high as 0.8% by December 2015. As for ARM’s EPS growth, we’ve since seen a very nice 23% followed by 32% in 2014 and 2015, respectively.


But if we look at the situation today, ARM is the company that has been raising its dividend faster, and Tesco is the one with the greater EPS growth on the cards. In fact, ARM’s dividend is being boosted way ahead of inflation. Its 2015 dividend payment was a full 25% ahead of 2014’s, which in turn came in 23% ahead of the 2013 payment — and forecasts suggest a further 14% lift this year.

Tesco’s dividend, meanwhile, was slashed to a mere 0.5% by February 2015 and is expected to yield a smaller 0.1% for the year just ended in February 2016.

Looking at EPS growth, while Tesco’s is expected to have slumped by 50% in the year just gone, the City’s analysts have a storming return to 80% growth predicted for the year to February 2017, with a further 33% pencilled-in for the following year. What’s more, these expectations would put Tesco shares on a PEG ratio of a tiny 0.3 this year, followed by 0.5 next — and anything under 0.7 is usually seen as a strong growth indicator.

ARM, meanwhile, is expected to turn in a 43% EPS rise in the current year, which is still excellent even if only little more than half Tesco’s growth prediction. But that would slow to 13% on 2017 estimates.

So on current showing, ARM is the dividend-acceleration powerhouse while Tesco is looking like the growth star!

Normality restored?

Of course, this is really just a short-term reversal caused by Tesco’s unprecedented slump. The slump came after the UK’s biggest groceries retailer completely failed to see the intense price competition and recession-led belt tightening that has sent shoppers in their hordes to the ascendant Lidl and Aldi.

So what we’re seeing should hopefully be a relatively short-term recovery situation, with Tesco dividends expected to yield around 2.2% by February 2018 — though for me, a P/E of almost 17 still seems very poor value.

But the thought worth pausing for is that ARM is well on its way to turning into a solid dividend payer. Sure, the 2017 payment is expected to yield only 1.2%, but that’s down to the huge share price growth that has accompanied ARM’s superb dividend progress.

Enormous yield

And get this — if you’d bought ARM shares at the end of 2008, not only would you have enjoyed an 11-bagger on the share price, but you could also be looking forward to an effective 2017 dividend yield of a massive 13% on your original 90p share price!

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.