Relying on the cash ISA? I’d put my trust in these FTSE 100 dividend hikers instead

Head to the stock market for a better return on your cash. Just don’t neglect dividend growth stocks, says Paul Summers.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Having at least some cash tucked away is something we strongly endorse here at the Fool. Once you’ve managed to build a decent buffer to protect you from unexpected life events. However, the question arises, as to what to do with any money left over?

When faced with the derisory rates of interest offered by cash ISAs (the less-than-inflation rate of 1.45% is the best you can currently get for an instant access account), I think it’s natural to make a beeline for high-yielding stocks, so long as these companies are actually capable of making such payouts.

Then again, even if a company offering a high yield is able to return the cash, a stagnant dividend isn’t all that attractive. Far more enticing are reasonably-priced quality firms (those that consistently achieve great returns on the capital they use) that also offer increasing cash payouts to their owners. 

With this in mind, here are two FTSE giants that I think tick these boxes. 

Dividends are served

£25bn-cap food and support services provider Compass (LSE: CPG) and its average-looking 2.5% yield doesn’t initially catch the eye. But stay with me on this. 

This is a company that has grown its payouts annually for many years. Indeed, if you’d purchased the shares a decade ago, you’d actually be getting a higher yield thanks to the growth in the company’s share price. Let me explain. 

In 2008/2009, the company returned 12p per share to holders. Its share price in March 2009 (when the final dividend was paid) was around 318p, giving a yield of 3.8%. Last year, the company returned 37.7p per share and has a share price over 1,500p. So, had you invested back in 2009, you’d have generated a yield of 11.9% on your original investment in 2018!

Of course, Compass won’t grow at the same pace over the next decade. Nevertheless, its average return on the capital employed (ROCE) over the last five years is a really-rather-good 24.1%. Free cashflow is increasing and dividends this year are likely to be covered twice by profits. You’ll need to pay 19 times expected earnings for the current year to acquire the stock.

Reliable hiker

Another FTSE 100 company with a good history of increasing its cash returns is consumer goods giant Unilever (LSE: ULVR) — owner of brands such as Marmite, Dove and Persil. Dividends here have been hiked in eight of the last 10 years. 

Of course, you could argue that its sheer size means Unilever’s stock is unlikely to appreciate in value all that much. At 3.6% for 2019, the dividend is more generous than over at Compass, but still much less than elsewhere in the market

While fair points to make, its defensive characteristics mean that Unilever is unlikely to sink in value either, thereby making it a decent choice for risk-averse investors. Earnings per share are predicted to rebound by 8% in 2019, leaving the stock trading on a forecast P/E of a little under 19. That’s not unreasonable, considering the 24.5% average ROCE over the last five years. 

In addition to the above, it’s also worth pointing out that Unilever’s payout ratio — the proportion of earnings paid out to shareholders — is a little under 38%. This should mean there’s scope for the company to continue increasing dividends in future years. 

Unilever reveals its latest set of full-year numbers to the market this Thursday. So watch this space.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Compass Group. 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.

More on Investing Articles

Investing Articles

2 powerful passive income stocks investors should consider snapping up

Building a passive income stream via dividend-paying stocks is possible, according to our writer, who details two picks to take…

Read more »

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

This UK stock has gained 42% since I bought it, but I think it’s still a bargain

Jon Smith outlines his reasons for thinking that a UK stock he owns has the potential to keep rallying for…

Read more »

Investing Articles

1 under-the-radar value stock I’m eyeing up for returns and growth

This Fool is looking for quality stocks at bargain prices and reckons this potentially overlooked value stock could be a…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

National Grid shares have plunged — but if I’d bought 2 years ago, would I be in profit?

National Grid shares are about 22% lower than in May, but that may just be a small blip for long-term…

Read more »

Investing Articles

This FTSE 250 stock looks unmissable — but buying shares now could be a mistake for me!

It’s tough when a stock looks fundamentally sound, but there’s a cloud hanging over it. This is what’s happening with…

Read more »

A Black father and daughter having breakfast at hotel restaurant
Investing Articles

Raspberry Pi shares are piping hot! Should I invest right now?

Raspberry Pi shares are certainly bearing fruit for those lucky enough to have invested early. Have I missed the boat…

Read more »

Dividend Shares

How much passive income from stocks could I make with a £37k salary?

Jon Smith takes a look at how much passive income he could make by squeezing all the juice out of…

Read more »

Young female analyst working at her desk in the office
Investing Articles

The Ashtead share price falls on FY results. Is it a good long-term buy?

High interest rates are bad for companies with high debt, especially if it's growing. But the effect on the Ashtead…

Read more »