FTSE 100: 3 of the best stocks to buy for dividend growth

Paul Summers selects three of his favourite dividend hikers from the FTSE 100 (INDEXFTSE:UKX) that he’d buy for an income-focused portfolio.

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Yesterday, I looked at a number of companies from the FTSE 250 that I’d snap up if securing a growing income stream were a priority. This morning, I’m doing exactly the same thing but with the FTSE 100. Here are what I consider to be three of the best top-tier stocks to buy. 

BAE Systems

The recent flurry of activity in the defence sector has turned the spotlight back on juggernaut BAE Systems (LSE: BA). For me, this has (and will continue to be) a great source of dividends. 

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The company’s down to return 24.6p per share in FY21. Using last Friday’s closing share price of 571p, that’s a yield of 4.3% — higher than that generated by the FTSE 100. What’s more, this income stream can be bought at a good price. Right now, BAE shares are changing hands for 12 times earnings. 

Of course, there are some drawbacks to investing here. I sincerely doubt BAE’s share price will ever explode. So, one ‘risk’ (aside from a dip in defence spending) is that I could ultimately make more money buying a stock with faster growth prospects and a more modest payout.  It’s also worth mentioning that dividend hikes, while consistent, aren’t massive, at roughly 2-4% a year.

Bunzl

If I were concerned with dividend growth rather than the size of those dividends, Bunzl (LSE: BNZL) is another company that would easily make my FTSE 100 shortlist. It’s been one of the most reliable top-tier hikers for years.

The reason for this is partly because it works in a defensive sector. Bunzl supplies consumable products such as disposable tableware, hygiene supplies and food packaging around the globe. It’s deadly dull stuff. And that’s what makes it so great, in my opinion.

As mentioned however, one potential drawback is the relatively small yield. A 55.4p per share return this year equates to 2.1%. That’s below what I could get from the FTSE 100 as a whole. So, is it worth taking on single stock risk if I could just buy a tracker and be done with it?

Personally, I think it might be, even if Bunzl trades on almost 19 times earnings. While hardly shooting the lights out, shares have done far better than the FTSE 100 over the very long term. And if dividends were reinvested, I suspect the difference in returns is even more stark. 

DCC

Dublin-based DCC (LSE: DCC) is my third pick of the best stocks to buy for dividend growth. Like BAE and Bunzl, the £6bn-cap sales, marketing and support services firm has a wonderfully-unblemished record of hiking its bi-annual payouts. 

Based on a potential 170p per share return in the current financial year, DCC yields 2.8%. Again, this is low relative to the FTSE 100 (and other constituents). However, the size of hikes in recent years is worth paying attention to.

Double-digit increases were seen in 2017, 2018 and in the last financial year. This is no guide for the future, of course, but it does make DCC stand out. What’s more, the shares still trade on a little less than 14 times earnings. 

Like the other companies however, DCC’s share price performance is unlikely to rival some of the index’s more glitzy members. I’d also need to be aware that this multi-faceted business could be impacted by a slowdown in demand for things like healthcare supplies and oil.  

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl. 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.

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 considered, so you should consider taking independent financial advice.

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