2 top UK dividend growth stocks for 2022

Halma and Bunzl both fit my criteria for dividend growth stocks and I would consider buying them in 2022 and holding for the long term.

| 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.

Hand holding pound notes

Image source: Getty Images.

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.

Dividend growth stocks have a track record of consistently growing their dividends. These types of stocks are attractive to me for a couple of reasons — first, the dividend. Getting paid a higher dividend each year is good. Second, there should be capital growth. Let’s say a dividend growth stock has a 4% yield on a trailing 12-month basis. The stock paid a dividend of 4p per share and is priced at 100p. Next year the dividend increases to 5p. If investors are still happy with a 4% yield, they will be willing to pay 125p per share now.

So long as the dividend keeps increasing, so should the share price. That’s something I want for my portfolio. So I had a look for top UK dividend growth stocks that I might want to buy for 2022 and beyond.

Screening for dividend growth stocks

I looked for stocks that grew their dividends at a compound annual growth rate (CAGR) greater than 5% measured over five years. Also, I required a CAGR in earnings, again measured over five years, of over 5%. Next, I looked for a less than 60% dividend payout ratio. If at least 40% of earnings are being invested in the business, that should grow future earnings, supporting further dividend increases. I did not want companies paying most of their earnings as dividends.

My screen returned over 30 stocks. I selected two from different industries. The two UK dividend growth stocks that I would consider adding to my portfolio for 2022 and beyond are life-saving technology company Halma (LSE:HLMA) and international distribution and services company Bunzl (LSE:BNZL). Both of these stocks are members of the FTSE 100 index.

FTSE 100 dividend growth stocks

Bunzl certainly has the hallmarks of a UK dividend growth stock. It has grown its dividend at a five-year CAGR of 9.55%. The company has grown through a mixture of organic growth and bolt-on acquisitions. Revenues have been growing well, and earnings have followed. In fact, earnings have grown faster than dividends. This has seen the company’s dividend cover increase over time, giving the dividend a good margin of safety. However, Bunzl shares trade at a price-to-earnings ratio of 18. That is relatively high compared to the industry and wider market. In addition, operating margins are consistent but slim at around 5.5% on average. Slim margins do not allow a lot of room to absorb increasing costs before earnings start to be affected. Growing earnings in part from bolt-on acquisitions require attractive purchases to be available. There is always the chance that these will dry up.

Table 1. Halma and Bunzl: key stock characteristics

Company Ticker Market cap 5-year dividend CAGR 5-year earnings CAGR Trailing 12-month dividend cover 5-year stock price CAGR
Bunzl BNZL £9.18bn 7.3% 12.8% 2.49x 5.6%
Halma HLMA £9.13bn 6.6% 13.3% 3.81x 21.2%

Source: Company accounts and Yahoo finance

Halma has five-year CAGRs for dividend and earnings of 6.6% and 13.3%. Like Bunzl, earnings growth is outstripping dividend growth and has increased the dividend cover to a healthy 3.81 times earnings. That makes the dividend relatively safe. Like Bunzl, Halma grows revenue organically and by sensible bolt-on acquisitions. But, Halma’s operating margin averages closer to 18%. Again, revenue growth at Halma is partly dependent on being able to find attractive bolt-on acquisitions, which may not always be possible.

I would consider adding Halma and Bunzl to my portfolio for their potential as long-term dividend growth stocks

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.

James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has recommended Bunzl and Halma. 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

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »