Compounding your gains and investing in rock-solid FTSE 100 dividend shares will make you wealthier, happier and more financially secure over time. It may sound blindingly obvious, but you wouldn’t believe the number of investors who get this wrong.
It’s easy to have your head turned by outlandish claims that you can triple your money in a year or get 15% dividends until the day you retire. After all, who doesn’t want to grow their money faster?
Casino-style returns just don’t exist in the real world and anyone who promises you different could be trying to steal your money.
So when a FTSE 100 dividend stock comes around with booming sales figures and a cast-iron payout history, investors should sit up and take notice. Here are three reasons I’ve chosen GlaxoSmithKline (LSE:GSK) for my Stocks and Shares ISA.
We’re well into earnings season now and Q3 results are stacking up on the mat.
Originally the pharma giant said its earnings per share would dip by between 3% and 5% but GSK produced some of the most impressive figures of the quarter with sales across its three divisions racking up 16% growth to hit £9.4bn. Operating profits also spun up to £2.1bn compared with 1.9bn in Q3 2018.
Chief executive Emma Walmsley noted on results day that the company “has made further good progress” with sales growth across consumer health, vaccines and pharmaceuticals.
The GSK dividend will stick at 80p per share, Walmsley said, as she upgraded guidance for the year. Glaxo has an impeccable dividend history and while the full-year payouts to shareholder have remained steady, rather than spectacular, the amount by which dividends are covered by earnings has improved year-on-year, suggesting reliable payments ahead.
Zoom out to a 10-year chart of the GSK share price and you’ll see the kind of rising trend line that we like here at the Motley Fool. Since 2009 the stock is up 42%.
One of the biggest drivers for the recent good news was a 30% leap in sales over the period in consumer healthcare. In the summer, GSK announced it had completed a joint venture with drug giant Pfizer. It brought well-recognised consumer brands like headache medication Advil and multivitamin Centrum into the GSK portfolio.
The long-term R&D benefits of the Pfizer deal are clear to see as 25% of the £500m savings from it will be used to develop more products.
The consumer health part of the business will be spun off and listed within three years, the company says. So GSK shareholders who buy now are expected to get the option to take shares in the new venture if they want to.
Solid share price growth
Along with your 4.5% a year dividend bonus for holding the stock, the GSK share price has returned 17.9% growth over the past 12 months, well outpacing the total market return of around 8%.
A price-to-earnings growth ratio of 0.8 is right in the sweet spot: anything over 1 and the shares would be looking overvalued, while numbers between 0 and 1 suggest higher returns are more likely.
Analysts also reckon GSK is undervalued based on free cash flow figures, suggesting there’s more to come from these shares. These kinds of numbers should make you happy long into the future as an income investor.
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Tom has a position in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.