5 top dividend stocks I’d invest £1,000 in for 2022 and beyond

These dividend stocks offer inflation-beating growth prospects and defensive profits, says Roland Head, who is considering them for his portfolio.

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Key points

  • I’m looking for stocks with inflation-beating dividend growth
  • Gaming, consumer goods and banking stocks are among my choices
  • One of these companies has a 30-year track record of dividend growth

When I’m buying dividend stocks, I always take a look at the yield they offer. But with inflation expected to hit 5% in the coming months, I reckon dividend growth is more important than ever. A flat dividend income means my spending power will fall in the future. 

What I really want to do is to build a portfolio of shares that will deliver reliable dividend growth, year after year. Here are five income shares I’d consider buying for raising dividends in 2022 and beyond.

US growth story tempts me

Home emergency repair service provider Homeserve (LSE: HSV) is best known in the UK for the insurance policies it sells through utility partnerships. However, the real growth story here is the US market, where membership services are more popular than in the UK or Europe.

During the six months to 30 September, profits from Homeserve’s US business rose 11% to £32.5m, while customer numbers rose 8% to 4.8m.  This business generated 65% of the group’s operating profit during the period.

My main concern as a potential buyer is Homeserve’s rising level of debt. This has lifted sharply in recent years as the group has funded acquisitions and new projects.

However, I’m still comfortable with the risk, given the group’s strong cash generation. Homeserve’s recent share price slide prices the stock on 14 times earnings, which looks reasonable to me. The shares also offer a 3.8% dividend yield that’s expected to rise by 11% this year. This dividend stock is on my shortlist to buy for my portfolio.

A top choice for gamers

Shares in wargaming specialist Games Workshop (LSE: GAW) have risen by 880% over the last five years. This impressive share price performance means that this old-school company has significantly outperformed popular video gaming stocks such as Keyword Studios (+310%) and Team17 (+210%) since 2017.

Games Workshop relies on an unusual combination of shops and online presence to draw customers.

An additional profit stream comes from royalties. Games Workshop is starting to exploit the potential of its intellectual property through video game and television deals. Royalty payments doubled from £9m to £20m during the six months to 28 November.

The main risk I can see for shareholders is that sales growth recorded in recent years won’t be sustainable. I don’t know how likely this is — I’m not a customer.

However, the company’s high profit margins, excellent cash generation and long track record suggest to me that Games Workshop could remain an attractive dividend stock. The dividend is expected to rise by 11% this year, giving a 3% yield. I’m definitely interested.

A defensive dividend stock

FTSE 250 firm Cranswick (LSE: CWK) doesn’t get many headlines. But this meat producer has delivered unbroken dividend growth every year since 1988. Over the last six years, dividends have risen by an average of 13% per year, providing excellent protection against inflation.

Of course, there’s no guarantee Cranswick’s performance will be sustainable. Growing concerns about the environmental impact of large-scale meat production are a potential worry. And I’m not totally sure that the company’s recent decision to expand into pet food is a good idea.

However, Cranswick’s long track record of growth is attractive to me. I’m also tempted by the defensive nature of the group’s products. The group is a big supplier to supermarkets and sales are generally stable, even during a recession.

Cranswick shares don’t look especially cheap to me, trading on 17 times forecast earnings with a 2% dividend yield. But the group’s 30-year track record of dividend growth is unusual in the UK. This is a stock I’d like to own.

The best bank?

The big FTSE 100 banks tend to grab most of the headlines. But they haven’t delivered very good results for shareholders since 2008. For my portfolio, I’ve chosen to own FTSE 250 merchant bank Close Brothers (LSE: CBG).

Close Brothers’ share price has risen by 145% since February 2009, compared to a gain of just 50% for Lloyds Banking Group.

This group has been in business since 1878 and specialises in commercial lending and automotive finance. Profit margins are much higher than at high street rivals and the bank’s management has avoided the costly mistakes made by larger peers.

Shareholders have benefited from this careful management. Close Brothers didn’t cut its dividend during the financial crisis. Indeed, until the pandemic, the bank hadn’t cut its payout for more than 30 years.

Future dividends are never guaranteed and Close’s exposure to property and business lending could lead to big losses during a recession. But the bank’s long track record gives me confidence. I’m also tempted by this stock’s 5% dividend yield and expected growth. I’m happy to have this banking share in my portfolio.

An overlooked dividend stock?

My final pick is consumer goods group PZ Cussons (LSE: PZC). This business is known for brands such as Carex and Imperial Leather and operates globally.

Profits have dipped this year as sales of Carex sanitiser and handwash return to normal levels after record sales during the pandemic. But the performance of the group’s remaining business is improving under newish chief executive Jonathan Myers.

The CEO took over at a difficult time for the group. PZ Cussons’ product portfolio had become confused, there were problems in Africa, and growth had stalled. It’s too soon to be certain that Myers simplification strategy will return the business to growth. But my impressions so far are positive.

After surging higher during the pandemic, PZ Cussons’ share price has pulled back. The stock now trades on 14 times forecast earnings, with an expected dividend yield of 3.3%.

Although dividend growth is expected to be limited this year, I see this business as a good long-term pick for inflation protection, due to the essential nature of many of its products.

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 Close Brothers Group and PZ Cussons. The Motley Fool UK has recommended Games Workshop, Homeserve, Keywords Studios, Lloyds Banking Group, and PZ Cussons. 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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