When we seek out dividend-paying stocks, the first thing most of us look for is a high yield — and with the FTSE 100 offering a long-term average of around 3%, there are plenty that can beat it with yields of 5% and more. But if you’re building a long-term income portfolio, I’d say it’s at least as important to look for annual cash handouts that are rising ahead of inflation, because those are tomorrow’s dividend stars, and you’ll do so much better if you can get them at today’s share prices.
High tech divi?
Look at ARM Holdings (LSE: ARM), for example. With a forecast dividend yield of only around 1% on today’s price of 920p, there are few out there who would see it as an obvious income investment. But the 8.6p per share forecast for this year would represent a massive 23% boost on last year’s 7p payout, and there’s a further 20% lift being forecast for 2016.
And that will continue ARM’s strategy of raising its dividend way ahead of inflation — the 7p paid in 2014 was 23% ahead of the 5.7p in 2013, which in turn was 27% better than the 2012 figure of 4.5p.
If you’d bought ARM shares in early 2010 at around 200p apiece, the mooted 2015 dividend would bring you a yield of 4.3% on your original purchase price, rising to 5.1% in 2016.
The insurance sector is a more traditional place to look for dividends, although the liquidity crunch left some of them overstretched and they had to slash the cash. That didn’t happen at Old Mutual (LSE: OML), which prudently kept its dividends well covered by earnings, and provided a yield of 4.6% last year.
This year there’s a 4.3% yield on the cards, but what really attracts me is that the expected 9.7p would be 11.5% more than the 8.7p paid in 2014, and continues Old Mutual’s track record of blowing away inflation with its annual rises — and there’s a further 9.3% rise predicted for 2016. (The fall in yield is purely down to a bonus 16% share price rise so far this year, to 217p.)
And those who bought in early 2010 at around 120p will be enjoying a yield of 8% on their purchase price.
A recovery pick
Then there’s the recovering dividend at Lloyds Banking Group (LSE: LLOY). It was cancelled following the taxpayer bailout while Lloyds got itself back into shape, but there was a token 0.75p per share paid in the second half of 2014. That’s set to climb to a yield of around 3.2% this year on a share price of 80p, which would be more than three times covered by forecast EPS.
Even though we have a couple of flat years for earnings expected after the sale of TSB, there should still be plenty of room for the 50% dividend rise predicted for 2016, with the board of Lloyds having made their commitment to “sustainable and growing dividends” clear.
And if you were smart (and lucky) enough to have invested around the share price bottom of 2011, you’ll be looking at a yield of around 15% on your purchase price!
Investing in sustainable and growing dividends like these is an investment approach that has brought great long-term rewards for a century and more.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.