2 overlooked FTSE 100 dividend growth shares I’d buy in a Stocks and Shares ISA

These two FTSE 100 (INDEXFTSE:UKX) shares could offer strong dividend growth, in my view.

| 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.

While many income investors may naturally focus on the dividend yield offered by stocks when considering their purchase, companies that offer lower yields and impressive dividend growth could be worthy of consideration.

They may not only offer an increasingly appealing income return, but a rising dividend may suggest they are performing well from a business perspective. In the long run, this could lead to a rising share price.

With that in mind, here are two FTSE 100 shares that may not have high yields at present, but could produce improving income outlooks over the next few years.

Bunzl

Support services company Bunzl (LSE: BNZL) has a solid track record of dividend growth. In fact, over the last four years, the company’s dividends per share have increased from 35p to 50p. This equates to an annualised growth rate of over 9%.

Despite such a strong rate of growth, however, the company’s dividends are covered 2.6 times by profit. This suggests they could rise at a faster pace than profit growth over the medium term without hurting the financial strength of the business.

Bunzl’s acquisition-focused business model has proved to be highly successful. The company appears to have the financial firepower to engage in further acquisitions should they become available. As such, its medium-term growth outlook appears to be appealing.

Although the stock has a dividend yield of only 2.5%, its potential to raise dividends at a rapid rate over the coming years could mean it offers an improving income investing outlook. As such, now could be the right time to buy a slice of it.

Pearson

Education specialist Pearson (LSE: PSON) has endured a difficult period in recent years, with its financial performance coming under severe pressure. In response, it’s put in place a revised strategy that appears to be working well.

In the current year, for example, the business is forecast to post a rise in earnings of 13%. With its share price performance having been mixed over the last six months, it trades on a price-to-earnings growth (PEG) ratio of 1.6, which suggests it may be undervalued.

Clearly, a period of change and investment for the business may mean dividend growth is more limited than it otherwise would be. Despite this, it’s due to post a rise in dividends per share of 9% in the current year. And, with dividends expected to be covered 2.8 times by profit in 2019, there seems to be significant scope to raise them at a rapid rate over the medium term.

Although Pearson may lack the defensive appeal other FTSE 100 dividend stocks provide, the company’s dividend growth potential could allow it to outperform many of its index peers on a total return basis. While its 2.5% dividend yield may be relatively low, its income returns could rise quickly as it implements its strategy.

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.

Peter Stephens has no position in any of the shares 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.

More on Investing Articles

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Down 5%, Glencore’s share price looks a serious bargain to me now

Glencore’s share price looks undervalued to me, supported by strong earnings growth prospects and the potential resumption of extra shareholder…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’d invest £6,580 in this FTSE 250 REIT for £500 passive income

This FTSE 250 renewable energy enterprise is on track to become a Dividend Aristocrat! Here’s how I’d invest to earn…

Read more »

Investing Articles

Buying 1,000 of some dividend shares today unlocks £45 in weekly passive income!

These shares are among the biggest dividend payers in the FTSE 100. Should investors be buying them now to earn…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

If I’d put £5k in index funds 5 years ago, here’s what I’d have now

Investing in index funds is an excellent way to grow wealth with minimal effort. But how much money can investors…

Read more »

Investing Articles

10.2% yield! 1 of the top income stocks to buy in July?

A 10% yield's pretty rare, but this firm's been growing shareholder payouts for nine years! Does that make it one…

Read more »

Investing Articles

‘FTSE 100 to skyrocket to 10,000’! 1 cheap stock I’d buy before the surge

Analyst forecasts predict a massive surge for the FTSE 100 may be coming by April 2025! Should investors snap up…

Read more »

Investing Articles

My Taylor Wimpey share price prediction for the second half of 2024

Having underperformed the FTSE 100 from January to June, our writer reckons the Taylor Wimpey share price might enjoy a…

Read more »

Investing Articles

£10k in savings? Here’s how I’d aim to turn it into a £4,894 annual passive income with Aviva shares

Aviva might be one of the FTSE 100's hottest dividend shares right now. I'm banking on it to provide me…

Read more »