A search for fast dividend growth among the master investor's favourite blue chips.
Ace City investor Neil Woodford has thrashed the FTSE 100 (UKX) over the last five, 10 and 15 years. Hence, I always keep an eye on his holdings for promising investment ideas.
Woodford is very selective in picking shares for his £20 billion funds. Fewer than one in five of the UK's top 100 companies earn a place in his market-beating portfolios.
The following four companies are his fastest blue-chip dividend growers over the last four years:
| Company | Recent share price | Average annual dividend growth (%) | Forecast dividend yield (%) |
|---|
| Reckitt Benckiser (LSE: RB) | 3,893p | 24 | 3.2 |
| Wm. Morrison Supermarkets (LSE: MRW) | 252p | 23 | 4.6 |
| British American Tobacco (LSE: BATS) (NYSE: BTI.US) | 3,183p | 20 | 4.2 |
| Serco (LSE: SRP) | 550p | 20 | 1.6 |
Reckitt Benckiser
The global consumer goods group is a 5% holding in Woodford's funds, putting the maker of Cillit Bang, Dettol and Finish in his top 10 largest investments.
Reckitt's stellar 24% average annual dividend growth is in part due to the company raising its dividend payout ratio to 50% of earnings in 2008. Excluding that exceptional boost still leaves very strong growth of 16%.
However, it's worth noting that the dividend has been on a moderating trend in the tough consumer environment, and the latest interim payout was raised just 2%. The forecast yield of 3.2% is around the level of the market average.
William Morrison
The UK's fourth-largest supermarket is the only retailer Woodford deems worthy of holding in his funds.
Like Reckitt, Morrisons' impressive average annual dividend growth -- 23% a year -- has been boosted by raising the dividend payout ratio. A few years ago the ratio was a mere 24% -- well below that of Tesco and Sainsbury.
Morrisons is committed to raising the dividend by at least 10% a year through to 2013/14, which gives a pretty decent yield of 4.6% this year, rising to 5% next year.
British American Tobacco
The world's number two tobacco company is a top five holding in Woodford's High Income fund with a weighting of 6%.
The resilience of tobacco sales in all economic conditions, and increasing consumption in emerging markets, has enabled British American Tobacco to deliver average annual dividend growth of 20% under its policy of distributing 65% of earnings to shareholders.
The company raised its dividend by 11% last year, and this year's interim dividend by the same percentage. A continuation of that rate for the final dividend would support a yield of 4.5%, but analyst forecasts are more conservative and give a yield of 4.2%.
Serco
Woodford has been patiently building a holding in the UK's outsourcing giant over the past two years.
Serco has sailed through the post-credit-crunch recessionary environment, with public- and private-sector organisations increasingly turning to outsourcing non-core activities as a means of cutting costs. Serco's shareholders have been rewarded with average annual dividend growth of 20%.
Analysts are expecting earnings growth to have moderated this year and more of the same in 2013. Serco's dividend policy is to increase the dividend broadly in line with earnings growth, and the 2012 interim dividend was raised 6%. Analyst forecasts for the full year suggest a dividend payout ratio of little more than 20% of earnings, giving a miserly yield of 1.6%.
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> G A Chester owns shares in Reckitt Benckiser, but no other companies mentioned in this article.
