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.

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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.

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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

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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.

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