The best FTSE 100 income stock’s not necessarily the one with the highest yield. As well as paying plenty of income today, they need to keep paying it tomorrow too.
Lower yielding stocks can often be the most rewarding, says AJ Bell investment director Russ Mould, explaining: “A 1p per share dividend on a 100p share price may not catch the eye, but if that dividend reaches 10p in a decade it almost certainly will, all other things being equal.”
Top FTSE 100 stock
Which brings me to Intermediate Capital Group (LSE: ICG), a stock I’ve been looking at a lot lately. I wrote about it on 31 May, noting that its shares were up 72% in a year, and said it looked an unmissable buy.
Apologies for returning to it so soon, but I’ve just discovered another compelling reason to buy it. The private equity specialist has delivered the highest total return on the FTSE 100 in the past decade, a staggering 915.1%. That would have turned a £10,000 investment into £101,510. And reinvested dividends played a huge role in its success.
At first glance, the dividend isn’t anything to go bananas about. The trailing yield is 3.45%, below the FTSE 100 average of around 3.8%. But that’s mostly due to strong share price growth of 53.61% in the last year. When a share price rises, the yield automatically falls.
Intermediate Capital Group’s a great dividend stock. Over the last decade, it’s delivered an average compound dividend growth of 14.4% a year, AJ Bell figures show. That thrashes the FTSE 100 average of 3.3%.
The dividend per share hasn’t increased in a smooth upward ark. It jumped 20p to 76p in 2022, as my table shows. In the last two years, growth was a modest 1.5p per share.
Private equity play
As a global alternative asset manager, its job is to supply capital to growing businesses. Revenues, profits and earnings per share growth therefore dart about depending on asset purchases and disposals. Yet over the long-term, everything is pointing the right way.
| 2020 | 2021 | 2022 | 2023 | 2024 | |
| Revenues | £413.6m | £829.2m | £982.1m | £639m | £949.6m |
| Dividend | 50.8p | 56p | 76p | 77.5p | 79p |
Private equity can be risky. These are tricky times, with interest rates expected to stay higher for longer, driving up borrowing costs and squeezing sentiment.
The UK industry’s braced for a crackdown, with Labour signalling it would close the tax loophole that allows private equity fund managers to pay capital gains tax on their bonuses, rather than income tax. However, that risk’s been known for some time, and doesn’t appear to have unsettled investors.
My biggest worry is that the Intermediate Capital Group share price cannot keep growing at this pace and will slow or even slip. That’s always the risk with whizzers like this. Now may be a frothy time to buy, just weeks after the group posted a 132% jump in full-yer profits to £258.1m, with performance fee income rocketing 276% to £73.7m.
Yet I think the long-term looks bright. The group raised $13bn of funds in 2024, beating guidance, and is targeting another $55bn over the next four years “at least”. No more faffing. I’ll buy it this month.
