3 great dividend growth stocks: Imperial Brands plc, Inmarsat plc & Unite Group plc

Are Imperial Brands plc (LON:IMB), Inmarsat plc (LON:ISAT) & Unite Group plc (LON:UTG) the best dividend growth stocks on the market?

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Today, I’m taking a look at why income investors should check out these 3 dividend growth stocks:

Wide Moat

With an adjusted operating margins in excess of 40%, Imperial Brands (LSE: IMB) clearly benefits from a wide economic moat, which stems from its strong brand portfolio and the considerable economies of scale that the company benefits from. This wide economic moat not only enables the company to generate generous cash flow which makes it a great dividend payer, but also throws up barriers to entry which makes it a sustainable dividend stock too.

The tobacco company also has a great track record of delivering robust dividend growth. Since the company’s 2008 rights issue, dividends per share have almost doubled, with a compound annual growth rate (CAGR) in shareholder payments of 11.6% over the 6-year period.

Looking forward, we should expect the company to deliver only a slightly slower rate of growth. City analysts currently forecast underlying EPS will grow by 12% this year, with dividends set to increase by 10%. For the following year, earnings is set to climb a further 8%, while dividends are forecast to rise by another 10%. This would imply its shares trade at a forward P/E of 14.9 (which would fall to 13.8 by 2017), with a prospective dividend yield of 4.2% (and rising to 4.6% by the following year).

Defensive

With a 5-year beta of 0.47, satellite communications services company Inmarsat (LSE: ISAT) is widely considered to be a defensive stock. A stable demand base for its services means the business generates consistent cash flows through good and bad times, and this is a key factor to consider when evaluating the attractiveness of a dividend stock.

Strong cash flows coming from its new Global Xpress satellites and a strong US dollar could see the company deliver 8% growth in its dividend payout this year. This would give its shares a prospective dividend yield of 4.0%. Looking further ahead, there is much potential for further dividend growth in the longer term, as the adjusted dividend payout ratio is expected to fall to less than 60% by 2017.

While those aren’t eye-popping numbers in terms of growth and yield, quality and security always comes at a price.

Attractive

Student rental accommodation is one of the hottest new asset classes out there. Because the student population is relatively reliable, year-on-year, student accommodation is less cyclical than most other property asset classes, meaning investors benefit from stable income flows throughout the business cycle.

Unite Group (LSE: UTG), a student accommodation property developer, currently pays a dividend yield of around 2.4%, which does not seem particularly tempting in comparison to FTSE 100’s weighted average yield of 3.9%. But successful income investing has always been more than just looking for the best dividend yield. Dividend growth is often more important than its yield, and Unite Group has great growth prospects.

Adjusted EPS growth in 2016 is expected to come at around 9%, with a further 17% growth in 2017. With such an attractive outlook on earnings growth and dividend cover in excess of 1.5x, Unite Group has considerable room for further dividend growth in the near future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

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