2 top dividend growers for 2017

Kevin Godbold hunts for reliable dividend growers for his SIPP.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m transferring funds from a managed pension into my SIPP. Before the funds arrive, I’m researching to build a watch list of stocks. This new segment of my portfolio will target a dividend growth strategy influenced by well-known successful fund manager Neil Woodford.

A simple, yet effective, approach

Last year, Mr. Woodford said: “In very simple terms, our total return expectation for a stock equals its dividend yield plus the anticipated rate of dividend growth.” 

Focusing on the strength of a growing income stream like that can lead to capital appreciation taking care of itself — if the dividend keeps going up, the share price will likely go up too, as long as the shares don’t overvalue the company.

So I’m doing all I can to make sure the firms on my watch list have strong, good quality underlying businesses, reasonable valuations and, above all, the ability to keep pushing their dividends up year after year.

Today, I’m looking at paper and packaging firm Mondi (LSE: MNDI) and utility cost management consultancy Utilitywise (LSE: UTW) to see if they make the cut for my new watch list.

Impressive dividend records

I can’t fault either firm on their dividend-raising records. Since 2010, Mondi’s dividend is up around 136% and Utilitywise has pushed up dividend payments more than 600% since 2012. Looking forward, City analysts following these firms expect Mondi’s dividend payout to rise another 5% or so during 2017 and Utiltywise’s by around 11% to July 2018.

Mondi’s business has generated decent, rising operational cash inflows that lend support to profits, and borrowings seem under control with net debt running around 1.5 times the level of operating profit. Utilitywise’s cash inflows are more patchy, but net debt is insignificant at around at 1% of operating profit.

Mondi’s operating profit margin runs around 15% and the return on capital employed at just over 19%. Meanwhile, Utilitywise has an operating profit margin close to 21.5% and a return on capital employed of 23%.

These are good figures, so it seems that both firms run good-quality, cash-generating and growing businesses.

Valuations

At a share price of 1,649p, Mondi trades on a forward price-to-earnings (P/E) ratio around 13 for 2017 with the payout covered almost 2.5 times by anticipated forward earnings. Meanwhile, at 185p, Utilitywise’s forward P/E ratio runs at just over nine for 2017 and the dividend yield around 3.8% with the payout covered 2.8 times by forward earnings.

Neither of these companies seems to be overvalued and their businesses look steady. However, both businesses have an element of cyclicality to operations and if world economies tank, I’m sure that trading, and the share prices, will go down in each case.

That said, there’s no sign of business faltering at the moment, but because of their inherent cyclicality I think both companies deserve to maintain a moderate valuation. So, I’m not expecting gains from a valuation uprating, just steady trading progress. I’m happy to include these two on my watch list and may buy some of their shares when my new funds arrive.

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.

Kevin Godbold 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.

More on Investing Articles

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A brilliantly reliable FTSE 100 share I plan to never sell!

This FTSE-quoted share has raised dividends for more than 30 years on the spin! Here's why I plan to hold…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

This 7.7% yielding FTSE 250 stock is up 24% in a year! Have I missed the boat?

When a stock surges, sometimes it can be too late to buy shares and capitalise. Is that the case with…

Read more »

Investing Articles

£13,200 invested in this defensive stock bags me £1K of passive income!

Building a passive income stream is possible and this Fool breaks down one investment in a single stock that could…

Read more »

Investing Articles

I think the Rolls-Royce dividend is coming back – but when?

The Rolls-Royce dividend disappeared in 2020 and has not come back. But with the company performance improving, might it reappear?

Read more »

British Pennies on a Pound Note
Investing Articles

Should I snap up this penny share in March?

Our writer is considering penny shares to buy for his portfolio next month. Does this mining company merit a place…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Stock market bubble – or start of a bull run?

Christopher Ruane considers whether the surging NVIDIA share price could be symptomatic of a wider stock market bubble forming.

Read more »

Investing Articles

Buying 8,254 Aviva shares in an empty ISA would give me a £1,370 income in year one

Harvey Jones is tempted to add Aviva shares to his Stocks and Shares ISA this year. Today’s 7.37% yield isn't…

Read more »

Investing Articles

Is the tide turning for bank shares?

Bank shares are trading on stubbornly cheap-looking valuations yet business performance in the sector is broadly robust. Should our writer…

Read more »