Want to beat the FTSE 100? These 2 dividend growth stocks could help

These two growth and income champions have a history of crushing the FTSE 100 (INDEXFTSE: UKX).

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Every investor, including myself, wants to beat the market. Unfortunately, outperforming an index like the FTSE 100 is harder than it first appears. 

Indeed, most investors fail to meet this objective, and even the professionals struggle. However, I’m confident that I’ve found two companies that can help you achieve this objective because they already have a history of doing so. 

A challenger rises up 

Shares in challenger bank Arbuthnot Banking Group (LSE: ARBB) have smashed the FTSE 100 over the past five, 10 and 15 years. Whichever period you look at, the shares have racked up a market-beating performance. 

According to market data provider Morningstar, over the past 10 years the FTSE 100 has produced a total annual return for investors of only 4%, and 4.2% over the past 15 years. Meanwhile, Arbuthnot’s stock has returned 23% per annum since 2008, and 11.5% since 2003. 

I see this performance continuing. City analysts are expecting the bank to report EPS growth of 25% for 2018, and an increase of 67% for 2019. With profit up 40% in the first half of 2018, it looks as if the bank is well on the way to meeting these figures, and possibly even beating the City’s EPS growth target for the year. I’ll be keeping an eye on analyst estimates over the next few months to see if they’re revised higher. 

To help drive growth, Arbuthnot also revealed today that it’s looking to establish a new lending division called Arbuthnot Specialist Lending. 

All in all, it looks to me as if Arbuthnot is firing on all cylinders. With the stock trading at a PEG ratio of only 0.4 — a ratio of less than one indicates the shares offer growth at a reasonable price — they seem cheap compared to the challenger’s expected growth rate. On top of its attractive valuation, Arbuthnot’s stock also yields 2.2%. 

All of the above indicate to me that Arbuthnot can continue to outperform the FTSE 100.  

Packing profits 

Packaging company Macfarlane (LSE: MACF) is another FTSE-beating champion I like. Over the past 12 months, the shares have more than doubled in value, easily beating the FTSE 100’s 2.9% gain (excluding dividends).

Over the past five years, the performance is even more impressive with the stock up 200%. Earnings growth has been the driver of returns. On average over the past five years, EPS have expanded at an average annual rate of 19%, and City analysts are expecting the growth to continue

The City is estimating EPS growth of 32% in 2018 and Macfarlane seems to be well on the way to hitting this target. “Group profit for the year to date is well ahead of that achieved in 2017,” a trading update issued before the firm’s AGM in May noted. “Recognising the influence of the online retail sector in the second half of the year, the Board is confident that Macfarlane will perform in line with its expectations for 2018,” the update continued. 

Based on current growth estimates the shares are trading at a forward P/E of 14.4, which isn’t too demanding in my view. Considering Macfarlane’s track record of growth, and future outlook, I believe its FTSE 100-beating performance can continue.

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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