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This FTSE 100 tech stock is my favourite dividend growth bet

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What defines a great dividend stock, in my opinion, isn’t just its yield or how often it pays out dividends, but rather its consistency. 

In my never-ending quest for a solid passive income, I’ve come to the conclusion that companies with a hefty profit margin, durable competitive advantage and conservative cash management strategies eventually end up handing back the most cash to shareholders. 

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These companies tend to boost their dividends year after year, even when the economic cycle turns, simply because they have so much cash to spare. They also tend to have a track record of steadily increasing dividend payouts for several years and a rosy outlook for growth in the foreseeable future. 

A stock that seems to fit this description perfectly is software giant Sage Group (LSE:SGE). Here’s a closer look at Sage’s dividend strategy.

Steady expansion

Sage has been handing cash back to shareholders since early 2005. Over the past decade, the company has increased its dividend every single year. The payout has compounded at an annual growth rate of 8.65%. For context, the FTSE 100 has delivered a total return ( with dividends reinvested) of 8.3% over the same period. 

Robust fundamentals

The underlying engine of Sage’s consistent payouts is the strength of the company’s business model and its balance sheet. The company has managed to keep raising dividends year after year because revenue and earnings have been steadily expanding. Earnings per share have compounded at a rate of 9.7% since 2014.  

Sage has about 55p of debt for every quid in equity, a 25% operating margin and £351m in cash and cash equivalents on the books, all of which paint a picture of a financially healthy corporation that can sustain dividends. 

Management has also consistently kept the payout ratio around 50%, which means it has plenty of room to comfortably expand dividends for the foreseeable future.  

Excellent outlook

Sage’s pivot away from software services to cloud-based subscriptions has really helped the company thrive in recent years. Not only is this new model more appealing to the company’s enterprise customers, but it also allows the firm to generate recurring revenue and expand margins. 

I believe major corporations that rely on Sage’s platform are likely to stick with it over many years. Meanwhile, the company can always deploy its cash hoard to acquire younger start-ups and tech innovators that add value to the core business and stay ahead of the competition. 

In other words, I expect the Sage team to keep generating value at the same clip over the long term. 

Foolish takeaway

Steadily growing dividends are the key to a stable passive income and early retirement. Companies that can demonstrate an ability to expand cash flow and shareholder returns over multiple years deserve to be on every income-seeking investor’s radar. 

With its irreplaceable suite of enterprise software solutions and its decade-long track record of dividend growth, Sage Group is one of my favourites in this category.

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VisheshR has no position in any of the shares mentioned. 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.

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