The Motley Fool

Forget the high yielders. I’d buy these 3 FTSE 100 dividend growth stocks instead

For reasons ranging from pre-Brexit jitters to rising competition and negative publicity, finding high-yielding companies in the FTSE 100 as a result of falling share prices hasn’t been all that challenging of late.

While partial to a dividend as much as anyone, I think it’s preferable to look for companies with a long history (i.e. around 10 years) of consistently increasing their annual dividends, not those that pay the most. More often than not, the latter end up getting cut anyway. Let’s look at some examples of top-tier companies I think make the grade. 

Three hikers

Accountancy software provider Sage (LSE: SGE) is a consistent dividend hiker, having increased its payout every year for the last 10 years. That, for me, sends a clear message we’re dealing with a strong and stable performer, even if — at 2.5% — the yield won’t get many investors salivating.

Another thing worth mentioning about Sage’s income credentials is the fact its payout ratio — the proportion of dividend its pays out relative to earnings — is still pretty low at a little under 40%. That should mean there’s scope for the company to continue throwing more cash at shareholders in the future. 

The above, when coupled with Sage’s history of generating high returns on capital and big operating margins, lead me to think its current valuation — at almost 24 times earnings — isn’t unreasonable. Quality businesses rarely go on sale at bargain-basement prices. 

Paper provider Mondi (LSE: MNDI) is another firm that’s shown a willingness to lift the proportion of profit it distributes to shareholders. With one exception (2016), it’s increased its dividend every year in the last 10. Right now, it’s forecast to yield a good-but-not-excessive 4.5% in FY2019.  

That’s attractive in my view, especially as payouts look likely to be covered well over twice by profits. Again, to be clear, there’s really no point buying a high-yielding stock if it looks like it’ll ultimately struggle to pay out to shareholders. Mondi’s owners should be just fine for now. 

Like Sage, the £8bn cap achieves good returns on capital and fat margins. Unlike Sage, Mondi’s stock currently changes hands for less than ten times expected full-year earnings after falling just over 25% in value over the last twelve months. Although further dips can’t be ruled out as we approach our Halloween showdown with the EU, that already looks temptingly cheap.

A final FTSE 100 member worth mentioning is Unilever (LSE: ULVR). The owner of brands such as PG Tips, Magnum and Marmite may not generate much excitement among market participants, but the fact remains that — in addition to its defensive qualities — it’s long been a source of rising dividends.

The near-3% yield, adequately covered 1.5 times by profits, looks pretty safe to me and I suspect investors are less likely to ditch the stock in the run-up to Brexit than other stocks in the FTSE 100. Moreover, it’s worth mentioning that had you purchased the shares a decade ago, you’d actually be getting a far higher yield on your original investment, thanks to the 200%+ rise in the company’s share price since then. 

The only drawback to all this is that the predictability of Unilever’s earnings and its geographical diversification means the stock is nearly always expensive to buy. Right now, its price-to-earnings (P/E) ratio is 22 — slightly higher than its five-year average of 21. 

High-Yield Hidden Star?

Discover the name of a Top Income Share with a juicy 7% forecast dividend yield that has got our Motley Fool UK analyst champing at the bit! Find out why he thinks “the stock’s current weakness may offer us the chance to buy a proven dividend performer at what could be a bargain price”. Click here to claim your copy of this special report now — free of charge!

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Sage 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.