If an income stock can have a high compound annual growth rate for its dividends, it’s a good sign for investors. Looking through the FTSE 100, I’ve been considering this growth rate for stocks over a five-year horizon. Here are two that can boast impressive average growth rates of over 20%.
Cash flow king
First up is Aviva (LSE:AV). Even with the share price up an impressive 47% over the last year, the dividend yield still sits at a generous 5.3%.
There are several reasons why the company has been able to consistently increase its dividend payments over the past few years. A big one has been the simplification of its structure. This has included selling non-core operations in France, Italy, Singapore, and other markets. This has raised over £7bn in cash, which Aviva used to strengthen its balance sheet and also pay out in dividends to investors.
Another factor (which bodes well for the future) is the solid operating cash flow growth. It’s experienced a period of higher life and pension inflows, as well as steady general insurance profits. Given the nature of the industry, I don’t see this changing anytime soon. This means that the dividend could continue to grow.
Finally, CEO Amanda Blanc has made a point of targeting shareholder returns (either through dividends or share buybacks) a priority. If the decision to payout funds comes from the very top of the tree, it bodes well for income investors. As long as she remains as CEO, I can’t see this changing.
Some see the simplification of structure as a risk in the future. It means Aviva’s concentrated on just a few markets, such as the UK. Underperformance in these areas could put more pressure on the group overall.
A debt-free firm
Another company is Games Workshop (LSE:GAW). It has a five-year compounded dividend growth rate of 28.47%. When I look at the fundamentals of the business, it’s easy to see why dividends have grown so significantly.
Regardless of whether you enjoy buying Warhammer miniatures or not, you can’t argue with the strong operating margins (35%–40%). These are high thanks to in-house manufacturing and premium pricing. As a result, it converts a large proportion of profit into cash. This, in turn, enables the company to distribute substantial dividends to its investors.
Notably, Games Workshop has no long-term debt and holds a robust cash position on its balance sheet. This is another tick for dividend investors, as it means that precious cash flow isn’t being eaten up by interest payments or debt restructuring.
It’s true that the 3.46% dividend yield isn’t crazy high. However, it exceeds the FTSE 100 average. With the stock up 37% in the past year, the potential for capital gains is another positive going forward.
Given that I don’t see the operating margins being cut anytime soon, or any debt being taken on, I think the dividend could keep growing. One risk is that the business operates in a niche market, so it’ll be harder to grow and expand at the same pace forever, as the target market isn’t unlimited.
I think both companies offer strong dividend potential for investors and therefore, are worthy of consideration.
