It’s tempting to assume that income investors should always prioritise buying FTSE stocks with massive yields. However, there are times when shooting for a smaller payout could make more sense. An example would be if the company has shown great form when it comes growing dividends over many years.
Boring but brilliant
International distribution and services specialist Bunzl (LSE: BNZL) is one candidate to consider. The items it handles — think food packaging and cleaning supplies — won’t set the pulse racing. But it’s partly because these things are essential that management has been able to keep raising the dividend year after year.
That said, existing investors will be wanting to forget 2025. Weaker demand in its biggest market (North America) pushed many to the exits. By the end of December, the share price had fallen by 40% or so.
But if there’s one good thing to come from all this, it’s that Bunzl shares are currently cheaper than usual. A price-to-earnings (P/E) ratio of 13 is significantly below the firm’s five-year average P/E of 19. And those dividends? Unless trading falls through the floor, the 3.4% income looks safe for now.
This stock probably won’t recover in value quickly, especially if cost inflation keeps shrinking margins.
However, as a more-reliable-than-most source of passive income, I think it takes some beating.
Steady income
Getting exposure to a utility stock or two is also worth pondering. Yes, we know that cash distributions by any company can never be guaranteed. But the beauty of firms in this part of the market is that their business models are stable and earnings are relatively predictable.
This is why my second pick is water firm United Utilities (LSE: UU).
Like Bunzl, United has been raising its dividend for multiple years. We’re not talking explosive growth — an average of 4% every year, in line with inflation. But I reckon most income investors would prefer consistency over the former.
Right now, the forecast dividend yield for FY27 stands at 4.1%. That’s solid if not exactly flashy. It’s also more than someone would get from owning a FTSE 100 tracker. In direct contrast to Bunzl, United’s share price has also been rising very nicely in recent times (+24% in the last year).
Risks here include the tight leash of the regulator and high debt due to huge capital expenditure requirements. But these are par for the course in this space.
FTSE dividend growth star
A final example of a company with a great track record for raising dividends is wealth manager Rathbones (LSE: RAT).
Supported by high margins and the fairly recent merger with the UK arm of Investec, the growth rate here averages out at around 6%–7% per year. What’s more, analyst projections have it yielding 5.1% this year.
However, Rathbones isn’t a nailed-on winner. A market crash could see clients pulling their money out, leading to a reduction in fees and eventual profit. That could slow future dividend growth and might even lead to a cut. Even in good times, the £2.3bn cap operates in a competitive industry.
But that is precisely why I’ve made sure that all three mentioned here work in different sectors. In theory, spreading money around the market in this way makes it less likely that the income stream will ever dry up completely.
