3 of the best dividend growth stocks to buy now

These dividend growth stocks could help build an inflation-beating passive income, says Roland Head, who owns two of them.

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As an income investor, I often find myself choosing between high-yield and dividend growth stocks.

My preference is to aim for a mix of both, so my portfolio delivers yield and dividend growth that’s above the market average. The three companies I’m looking at today are stocks I’ve picked for dividend growth, but they still offer decent yields too.

Still the best?

FTSE 100 consumer goods group Unilever (LSE: ULVR) is a popular choice for investors wanting income and growth. 

The Anglo-Dutch group’s dividend has risen every year for more than 50 years, thanks to popular brands like Hellmann’s and Lipton. Since 2015, the payout has grown by an average of 7% each year.

Although Unilever shares have fallen by 5% over the last year, the stock has outperformed the market over the last five years.

I’ve been using the recent weakness to buy this dividend growth stock. In my view, the stock’s current dividend yield of 3.4% should be a decent entry point for a long-term holding.

The main risk I can see is that Unilever could struggle to develop successful new brands without sacrificing its profit margins. I don’t know how likely this is, but in my view Unilever’s 150-year history suggests the company will probably continue to adapt and evolve.

Make mine a double

Drinks companies are generally considered to be pretty defensive businesses. Even during recessions, people still keep buying their favourite tipple. One company I own in this sector is Stock Spirits Group (LSE: STCK). This group’s largest markets are Poland — where it has a 31% share of the vodka market — and the Czech Republic.

Stock’s revenue fell only 3% last year, despite the widespread closure of restaurants and bars. This suggests to me customers stayed loyal to Stock’s brands when they were stuck at home.

One concern I have is that the company’s strategy includes growing by acquisition. Not all of its previous deals have delivered good value for money. However, the current management team has promised to stay focused on its core markets, which should reduce this risk.

Stock’s dividend has grown by an average of 10% per year since 2015. The shares currently trade on 15 times forecast earnings, with a 3.1% yield. I recently added to my holding and view the stock as a buy at current levels.

An overlooked dividend growth stock?

My final pick is FTSE 250 banking stock OSB Group (LSE: OSB). Formerly known as OneSavings Bank, OSB is a specialist lender that does most of its business with buy-to-let landlords.

In my experience, smaller specialist banks are often more profitable than the big high street names. That seems to be true here. OSB’s return on equity has averaged more than 20% since 2016, compared to 5% for high street giant Lloyds.

OSB’s dividend has risen by an average of 11% per year since 2015. Lloyds payout has fallen over the same period.

Of course, being smaller and more specialised has risks. If the housing market crashes, OSB could see a sharp rise in the number of borrowers unable to repay their loans. The bank wouldn’t have any other line of business to offset these losses.

Even so, I think OSB’s 4% dividend yield looks pretty safe. This year’s payout should be covered three times by earnings. That looks sensible to me, so I’d be happy to buy.

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.

Roland Head owns shares of Stock Spirits and Unilever. The Motley Fool UK has recommended Lloyds Banking Group and Unilever. 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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