This explosive UK stock has hiked dividends by 14.6% a year for a decade. Time to buy?

Harvey Jones was blinded by the low yield on this UK stock and didn’t realise it was one of the best dividend growth plays on the FTSE 100.

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The London Stock Exchange Group (LSE: LSEG) isn’t just a top UK stock for growth, it’s a dividend machine too.

With a trailing yield of a meagre 1.24%, it doesn’t look like a FTSE 100 Dividend Aristocrat. Yet that’s what it is.

Lately I’ve been piling into high-yielding blue-chips but low yielders can be even better if the board keeps hiking shareholder payouts over time. Which is exactly what the London Stock Exchange Group has been doing.

Top LSE income stock

I’ve just been sent figures by AJ Bell showing the board has increased its dividends at an average compound annual growth rate of 14.6% for the last decade. Only a handful of stocks have done better.

Someone who reinvested all of their dividends straight back into the stock would have got a blistering total 10-year return of 522.5%. Which underlines how a combination of share price and dividend growth can compound to deliver a blockbuster total return.

Over the last year, the London Stock Exchange Group share price is up a relatively moderate 8.96%. Over five years, it’s up 73.23%. Dividends are on top, of course.

When a share price grows, the yield automatically falls. It’s a mathematical certainty, all else being equal. The yield peaked at 4.31% in 2009, but the soaring share price has steadily eaten away at that. Let’s see what the chart shows.

Chart by TradingView

Don’t be fooled though. It’s the dividend growth that matters here, and it’s been spectacular. AJ Bell forecasts that this will continue, although at a slightly slower pace of 7.9% in 2024 and 12.1% in 2024. I still think that looks pretty promising.

But one figure worries me. The London Stock Exchange Group isn’t exactly cheap right now. It shares trade at 63.08 times earnings.

Dividends at a price

Data companies tend to be pricier given their growth prospects but that’s vastly higher than the FTSE 100 average of around 13 times. Unsurprisingly, it’s climbed with the share price. Let’s see what the chart shows.

Chart by TradingView

I’ve never bought a share at such a heady valuation. Once the P/E creeps above 20 times earnings, I get the heebie-jeebies. I may not be the only wary investor. This could explain why the shares have grown only modestly lately.

Yet this is not just a growth stock. It’s an income hero too. The dividend looks well supported with £1.8bn of equity free cash flow in 2023. The board hiked it by 5.3% and returned £1.2bn via share buybacks. It plans another £1bn in 2024.

What’s also exciting is that it is working closely with Microsoft to embed artificial intelligence into its data.

The group has made a strong start to 2024 but I’m struggling to get past that valuation. It’s also operating in a competitive market, up against big US operators like Bloomberg and FactSet.

I’m keen to add it to my portfolio but not at today’s price. If we get a stock market dip, this will be high on my shopping list.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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