When looking for growing dividend stocks, it’s important that the companies operate in a stable industry and have clear guidance for investors.
Over the last 12 months, the FTSE 100 has outperformed the S&P 500 (-2%) Russel 2000 (-18%), Nasdaq 100 (-7.7%), Dow Jones Industrial Average (-4.7%) and the Wilshire 5000 (-6.7%).
A key reason for this outperformance is due to the stable earnings of the top FTSE 100 constituents, which tend to be mature cashflow rich businesses, unlike in the US, where the top S&P 500 constituents are valued based on their growth potential rather than current earnings.
Below are two top FTSE 100 stocks I’ve increased my position in recently because of their long history of capital returns and stable growth expectations.
A healthcare dividend stock
Last year GlaxoSmithKline (LSE: GSK) announced it would cut its dividend and spin off its consumer healthcare business under its own exchange listing.
By separating the consumer health business, the two separate entities (GlaxoSmithKline /Haleon) can refocus on their core operations and individual long-term goals.
By investing in GlaxoSmithKline I’m gaining exposure to its consumer healthcare segment, which owns popular brands such as Sensodyne, Panadol, Advil, Voltaren, Theraflu and Otrivin. These products are less sensitive to an economic slowdown as healthcare products like toothpaste or pain relievers are treated as a necessity by consumers.
I also benefit from GSK refocusing on its speciality medicines, vaccine and general drugs business, which is expected to grow by more than 5% annually over the next decade.
The separation will include a dividend cut, from 80p per year down to 55p per year (44p from GlaxoSmithKline and 11p from Haleon). This implies a dividend yield decrease from 4.6% down to 3.17%.
Since GlaxoSmithKline announced the dividend cut and separation last year, its shares have rallied 28%. This is because the dividend today is not as important as the estimated earnings growth communicated by management, which will then lead to higher dividends in the future.
This stock has a 6.2% dividend
In recent years, valuations for tobacco companies have lagged behind stock market indexes due to ESG concerns. However, dividend payments have increased year over year from companies like British American Tobacco (LSE:BATS).
For me, investing in British American Tobacco is not a play on the long-term growth of tobacco consumption but rather a play on capturing aggressive capital returns as management buyback shares and distribute dividends.
Over the last four quarters, British American Tobacco has paid an annualised dividend of 6.2% (£2.18). With the exception of the pandemic, the company has increased its dividend payment every year for as far as records show (2002).
Despite an expected slowdown in tobacco consumption globally over the coming decades, British American Tobacco has already successfully diversified into non-combustible (vape) products.
This action, along with price increases for tobacco products, is expected to more than offset the growth lost from its combustible portfolio, leading to earnings growth of around 6% per year.
Conclusion
I believe GlaxoSmithKline and British American Tobacco offer a growing dividend and operate in predictable markets. Furthermore, over the last two years, both management and board members have purchased shares on the open market on several occasions.
These investments provide passive income and allow me to park my money as I look for additional investment opportunities in the event of a recession.
