A common strategy when investing in a Self-Invested Personal Pension (SIPP) is to focus on dividend-paying stocks. After all, these companies can provide a lucrative stream of passive income. And when combined with the State Pension, it can significantly improve a retirement lifestyle.
Sadly, actually finding quality dividend stocks to buy can often be a challenge. But there’s a bit of a cheat code used by many – Dividend Aristocrats.
Thanks to their relatively stable and reliable cash flows, Dividend Aristocrats are stocks that have systematically increased their dividend for at least 20 years. And the London Stock Exchange currently has 28 such enterprises to pick from, with two more (Ashtead Group and BlackRock Greater Europe Investment Trust) on the verge of joining this elite group.
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Britain’s Dividend Aristocrats
- DCC
- Diageo
- Diploma (LSE:DPLM)
- Halma
- Sage Group
- Scottish Mortgage Investment Trust
- British American Tobacco
- Bunzl
- Croda International
- F&C Investment Trust
- Spirax Group
- BAE Systems
- Alliance Witan
- Caledonia Investments
- City of London Investment Trust
- Cranswick
- Merchants Trust
- Murray Income Trust
- Global Smaller Companies Trust
- Bankers Investment Trust
- Derwent London
- Primary Health
- Scottish American Investment Company
- Spectris
- Rotork
- BlackRock Smaller Companies Trust
- Clarkson
- Henderson Smaller Companies Investment Trust
These businesses are operating across a variety of industries and economies. That’s great news for portfolio diversification. But what about yield?
With dividends constantly being hiked, surely the payout’s going to be impressive? Well, the average yield of these stocks is actually just 2.9%. With Aristocrats known for their dividend-hiking abilities, a lot of these shares trade at a premium valuation, resulting in unimpressive payouts.
Of course, this may only be temporary. After all, if the companies continue to boost dividends, the yield will naturally rise over time. Unfortunately, investors may be waiting for quite some time.
These companies aren’t keen on losing their aristocratic status. As such, a common tactic is to just increase payments by a tiny amount each year. Consequently, the average dividend growth rate among these firms is only 5.3%.
Investing in the best
Buying the entire FTSE Aristocrat basket can unlock a relatively reliable passive income stream for me. But most of us won’t have the cash for all of them. And to be honest, that stream isn’t likely to grow very fast, only slightly staying ahead of inflation. Yet there are a few exceptions, such as Diploma.
Today, the stock yields only 1.35%. But its growth rate is closer to 15%. And if management can maintain this level of expansion, it may only be a few years before the yield becomes far more meaningful – potentially even extending into double-digit territory.
Since Diploma operates at the heart of other businesses’ complex supply chains, demand for its services isn’t likely to disappear any time soon. In fact, its role as a value-added distributor continues to become increasingly essential, giving the stock plenty of longevity for future rate hikes.
Of course, it’s not a risk-free enterprise. The stock does have some fierce competition and is exposed to the risk of supply chain disruptions preventing order fulfilment to customers. But it may be worth considering taking these risks given the group’s impressive dividend potential. And it’s not the only Aristocrat worthy of a closer inspection as a potential addition to a SIPP portfolio.
