Dividend growth stocks – which offer rising cash payouts – tend to be excellent long-term wealth builders. While these stocks don’t always have the highest yields, research shows that in the long run, they often produce higher total returns (share price gains plus income) than stocks that don’t increase their dividends.
The good news for UK investors is that there are a lot of fantastic dividend growers listed on the London Stock Exchange. With that in mind, here are two to consider for 2024.
A defensive play
One stock that is often overlooked by dividend growth investors is defence specialist BAE Systems (LSE:BA.). I don’t know why – this company has an excellent track record when it comes to increasing its payout and it currently offers a healthy yield of around 3%.
I think this stock could play a valuable ‘defensive’ role in a portfolio next year. There’s a lot of geopolitical conflict/tension globally as we head towards 2024. If this was to escalate, I’d expect the share price to rise.
Zooming in on the dividend, analysts expect a payout of 32.2p for 2024, up from an estimated payout of 30p for 2023 (7% growth). A dividend coverage ratio (a measure of dividend safety) of around two is anticipated, which suggests there’s little chance of a cut.
It’s worth noting that BAE Systems shares have had a strong run in recent years. So, there is always the chance of a pullback in the near term, especially if geopolitical tension dies down.
Taking a longer-term view, however, I’m bullish.
The stock currently has a forward-looking price-to-earnings (P/E) ratio of 15.6, which is quite reasonable, to my mind.
Long-term growth potential
The second stock I want to highlight is alcoholic beverages giant Diageo (LSE: DGE). It’s very popular in dividend growth circles as it has increased its payout every year for over 20 years now. Currently, the yield is about 2.8%.
Diageo shares have taken a hit recently, and I see the dip as a good entry point.
Granted, the company is facing a few challenges at present. For example, consumer demand in Latin America has been weak recently. These issues could persist in 2024.
I remain optimistic about the long-term growth story, however.
India is one region I’m excited about. The Indian economy is booming at present. And experts reckon this economic strength could last for decades. This should translate to higher sales for Diageo subsidiary United Spirits.
I’m also excited about the growth potential of Diageo’s tequila brands (Don Julio, Casamigos, etc.). Tequila is the fastest-growing spirit globally at the moment.
Now, I’ll point out that analysts don’t expect much dividend growth this financial year. Currently, the consensus forecast for the year ending 30 June 2024 is 80p – the same payout as the year before. They then expect a payout of 84.1p per share the following year.
Personally though, I’d be surprised if Diageo was to hold its payout flat this financial year. Typically, when companies have long-term track records of consecutive annual dividend increases, they want to keep them intact.
Turning to the valuation, Diageo currently sports a forward-looking P/E ratio of 18.6. So, it’s still not cheap even after the recent share price fall.
This is a high-quality company, however. So I can justify the higher valuation here.
