Lloyds isn’t the only Footsie dividend-growth stock I’d buy today

Lloyds Banking Group plc (LON: LLOY) is set to become a dividend champion, but it’s not the only income stock I’m buying.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lloyds (LSE: LLOY) has impressed the market over the past few years as the bank’s earnings have recovered, its capital cushion has improved significantly, and it has resumed dividend payouts to investors. 

For 2017, City analysts are expecting Lloyds to distribute a total of 4.1p per share to investors, giving a healthy dividend yield of 6.1% at the time of writing. This healthy distribution follows a payout of 2.25p in 2015 and 2.55p in 2016 as well as two special dividends paid during this time. 

With such an impressive dividend growth record, Lloyds is rapidly becoming one of the FTSE 100’s top dividend stocks. However, it’s not the only Footsie dividend growth stock that deserves a place in your income portfolio. 

Cash cow 

Lloyds’ blue-chip peer Burberry (LSE: BRBY) has been building a reputation for itself as one of the market’s top income stocks for some time. With an operating profit margin of nearly 15%, the group is cash rich, and it generates plenty of funds to both reinvest back into the business and return to shareholders. 

Over the past five years, the dividend payout has grown by around 10% per annum and at the time of writing, the share supports a dividend yield of 2.7%, which is covered twice by earnings per share. What’s more, according to its most recent set of results, Burberry has around £654m of net cash on the balance sheet, which is a more than enough to support the dividend payout for several years. Indeed for the fiscal year to the end of March 2017, the payout only cost a total of £164m, so even if the company’s earnings disappeared altogether overnight, it would still be able to fund its dividend for four years. 

As well as the dividend, management has also started to return cash via share buybacks. By buying back stock, the company can increase earnings per share, which should translate into share price capital gains, allowing investors to benefit from both dividend income and capital growth. 

Steady payout growth

Unfortunately, over the next two years, City analysts believe that Burburry’s EPS will contract marginally, but this should not put any pressure on the dividend. In fact, analysts are expecting the dividend to continue to grow during this period as Burberry’s wide profit margins give it plenty of room for manoeuvre. 

City analysts also believe that strong capital generation will underpin dividend growth for Lloyds. Unlike its close peer RBS, Lloyds has the problem of having too much capital. Analysts think that the company ended 2017 with a Tier 1 capital ratio of 14%, 2% above its target of 12%. This means that it is well placed to increase cash distributions to investors. 

Estimates vary, but on average, analysts are expecting the bank to announce a full-year dividend of 4.1p for 2017. But some figures are as high as 5p and one set of analysts expects the company to complement its dividend distribution with a £500m share buyback. Even at the most conservative estimations, the bank is now on track to support a dividend yield of 6.8% for 2018, that’s excluding any special dividend distributions or other capital return. When coupled with its low valuation of early 9.2 times forward earnings, it’s difficult to pass up this market-beating dividend yield.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Burberry and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »