When it comes to earning reliable, recurring, and expanding dividends, UK shares stand apart as some of the best in the world. The London Stock Exchange is home to businesses with some of the most generous dividend policies, opening the door to enormous yields and chunky payouts.
Yet for my income portfolio, I’m interested in owning businesses that may have modest payouts today, but are potentially on track to pay enormous yields in the future.
How? By finding the stock capable of generating impressive and consistent cash flow growth. And three UK shares that I think fit the bill are:
Impressive income potential
As previously mentioned, none of these stocks currently offer a yield worth getting excited about. In fact, both Games Workshop and Howden Joinery pay below what FTSE 100 index funds currently offer at 2.2% and 2.6%, respectively, compared to 3.2% from UK large-caps.
But in the long run, that could all change.
Games Workshop continues to hit the mark with impressive new miniature ranges for its Warhammer franchises. At the same time, its licensing activities across video games are beginning to bring in substantial royalties as well as draw in a broader audience to its fantasy worlds.
Howden Joinery is on a similar trajectory. Despite encountering challenging headwinds within the home renovation market, the group has proven to be far more resilient than many of its peers.
Depot upgrades and optimisations have bolstered margins in a softer revenue environment. And by expanding its collection of fitted kitchens and bedrooms to cover a wider range of budgets, free cash flow continues to flow.
Subsequently, both businesses have been hiking payouts since my initial investment in 2022. And now my yields for Games Workshop and Howden stand at 5.7% and 3.3%, respectively – a trend that could continue into double-digit territory.
Incoming tailwinds
Safestore is another business primed to deliver payout growth, in my opinion. Much like Howden, the company is highly correlated with the residential real estate sector. That’s because a leading demand driver for self-storage stems from families needing temporary storage as they move houses or start renovation projects.
Higher interest rates have dampened demand for large expenditures, and Safestore’s occupancy has suffered as a consequence. But looking at its latest results, the tides seem to be shifting. Occupancy is back on the rise, and with it, so are dividends.
Weighing the risks
As a shareholder in these stocks, I’m obviously bullish. But that doesn’t mean I’m blind to the risks.
Stubborn inflation could prolong the process of cutting interest rates, resulting in consumers continuing to be squeezed.
As a premium discretionary retailer, Games Workshop could find growth increasingly more challenging, especially with the added pressure of US tariffs that are already impacting its US gross margins.
For Howden, higher rates continue to be a headwind for households postponing renovation projects. This also indirectly impacts Safestore, but with the firm also carrying a high level of debt, it means more cash flow gets gobbled up by interest expenses, leaving less for shareholder dividends.
Having weighed these risks against the potential rewards, I still believe these UK shares could outperform long term and are worth considering. But they’re not the only income stocks I’ve got my eye on right now.
