Here’s How ARM Holdings plc’s Dividends Will Beat SSE PLC’s And Centrica PLC’s

If you’re looking to build a top dividend portfolio, you’d seriously consider including big payers like SSE (LSE: SSE) and Centrica (LSE: CNA), wouldn’t you? But what if I told you that ARM Holdings (LSE: ARM), with its modest dividend yields of less than 1%, could beat them both as a long-term provider of cash? You might think I’m mad.

SSE has been paying out very close to 6% in dividend yields year after year, and is forecast to carry on doing the same this year and next. With the shares at 1,566p, there’s a yield of 5.7% forecast for the year ending March 2016, rising to a mooted 5.8% a year later. That continues SSE’s trend of dividend growth, with this year’s expected to be up 2% on last year.

So we have a high yield and annual rises ahead of inflation. And over five years the share price is up 37%, ahead of the FTSE 100. In many ways, SSE is a perfect dividend stock.

Dividend recovery

Things are similar at Centrica, whose annual yield is a little lower at around the 5% mark (though it’s better covered by earnings than SSE’s). The year ended December 2014 provided shareholders with a handy 4.8%, and it’s expected to provide 5.1% this year. But that does hide a bit of bad news, as the dividend is actually being cut in real terms as plummeting oil prices are hitting Centrica’s upstream business, and the rising yield is solely down to a falling share price which has dropped to 234p.

But rebuilding on a rebased dividend, there’s a 3.3% cash rise predicted for 2016 to take the yield to 5.3%. Centrica has been hurt a little in the short term, but there’s still a healthy long-term dividend outlook.

Let’s get back to ARM Holdings, and the puny-looking yield of 0.8% pencilled in for this year on the current share price of 1,056p. That doesn’t sound great, but it hides something far nicer — the forecast 8.4p per share would represent a 20% rise over the 7p paid in 2014! And the hike to 10.2p predicted for 2016 takes it up a further 21%!

20% rises!

The track record is there, too — the dividend was lifted by 23% in 2014, by 27% in 2013, by 29% in 2012, and by 20% in 2011. In fact, anyone who bought ARM shares in early 2010 would be looking at an effective yield this year of around 3.4% on their original purchase price, with it more than three and a half times covered by earnings. That yield is not quite up to Centrica or SSE levels yet, but it’s getting there — oh, and the share price has trebled in that time.

If you buy shares in all all three companies today and they all keep their dividends growing at current rates, it will take around 14 years for ARM’s effective dividend yield to overtake the other two — SSE and Centrica would be up to 7.5% to 8% by then, on the original purchase price of the shares, while ARM would be yielding about 8.5%.

Wind that on to the 20 or 30 years or more that many investors have ahead of them before they retire from the daily grind, and ARM shares would be wiping the floor with today’s “top” dividend shares.

Tomorrow’s best

This is, of course, based on a huge amount of guesswork, but it does illustrate something very important for those seeking long-term dividends — the best yields in the future will not necessarily come from today’s biggest payers, but from those with the most progressive dividend policies.

Looking to the long-term future of dividends and reinvesting them can get you to millionaire status by the time you retire.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings and Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.