Income growth investing: dividends which could grow for the next decade

Dividend growth investing is one of the most rewarding ways to invest. If a company can grow its shareholder payout year after year consistently, while maintaining its dividend cover, then in most cases profits should be going up. This ought to be a sign the company is doing very well.

To be able to have any confidence that a company will be able to grow its dividend consistently for a decade you want to avoid companies that are very cyclical, as they’ll likely be hit hardest in any future market downturn. That’s why I’ve avoided banks, miners and housebuilders in this list of potential dividend growth investments. Instead, I’m looking at National Grid and Reckitt Benckiser from the FTSE 100, both of which should have very reliable and steady earnings.

Then at the smaller end of the market, I’m looking at a share with more potential to grow and to increase its dividends. That company is GlobalData.

The FTSE 100 shares for income growth investing

National Grid

The US and UK electricity and gas transmission business is effectively a monopoly, particularly in the latter country. This gives it great visibility over earnings, as does the fact a lot of the earnings are regulated. A downside is the debt is high, but that said, it should be manageable given the earnings visibility the company has.

The more exciting part of the business is the Ventures business, which is unregulated. It develops, operates and invests in energy projects and technologies, as part of the global move towards clean energy production. It’s a good trend to be tapping into and one that might improve investor sentiment towards the company in the future. The Ventures business has a diverse portfolio of flexible, low carbon and renewable energy businesses across the UK, Europe and US, which includes sub-sea electricity interconnectors, liquefied natural gas, battery storage, wind and solar power.

This part of the group, alongside the potential to grow in the US, is what I think should keep the share price steady and allow the company to keep paying a rising dividend. The downside for this company is that for the most part it can’t raise prices and the dividend cover is already low.

The dividend is 5.1% and dividend cover is 1.14 and slightly down on the previous year. However, the dividend cover has tended to be low and I think the company will be able to keep paying and growing the dividend very steadily.

Reckitt Benckiser

The fast moving consumer goods (FMCG) company has had a good crisis. With a lot of cleaning products, like Dettol, Reckitt has been in a prime position among the large caps to take advantage of the pandemic as consumer behaviour has changed and a focus on cleanliness has become paramount. One of the big questions going forwards is: will this continue? The management believes so. I’m less sure, but I think nonetheless Reckitt could keep performing.

I think it has more dividend growth potential than its underperforming rival Unilever. The £5bn writedown on the rather desperate Mead Johnson acquisition, done under previous management, gives the opportunity for the company to improve. As well as to grow sales in China.

Emerging markets generally offer opportunities for growth for Reckitt. Its Durex condom brand is doing well in both China and India. Large, young and increasingly prosperous populations in these countries should help branded products sell well in these markets.

The dividend is 2.5% and it has dividend cover of about 2x earnings. Like National Grid, it has low dividend growth but I think that makes it more sustainable. Also, reinvesting in the business, as Reckitt is doing, will be good for shareholder returns in the future.

The AIM share for dividend growth and faster share price growth

GlobalData

From a dividend perspective this share looks really interesting. Unlike many other companies on both the FTSE and the AIM, it’s paying a rising dividend. Growth in the dividend has averaged 32% a year over the last three years, which is an impressive rate of return. From the perspective of income growth investing then, it could be a star.

The business is also well-positioned for growth. It taps into the trend of investors being willing to pay a premium for data. Perhaps in the belief that data really is the 21st-century version of oil. The fund manager Nick Train for example recently bought shares in Experian, even though previously he and his team had thought the shares were overvalued.

In the six months ended 30 June 2020, GlobalData’s operating profit increased 53% and its operating margin rose by 5% to 13%. This was even as revenue fell 2%, only because of a reduction in events revenue. The consequence of the Covid-19 pandemic.

The group carries net debt of £41.2m and the balance sheet doesn’t appear to be the strongest, but perhaps with so much growth to come that doesn’t matter as much as it might for a mature business?

Overall it looks like a strong business, especially if you’re looking for income growth.

The pandemic has knocked a lot of previously strong dividend growth companies. If you’re willing to look beyond the temporary blip, then companies like DiscoverIE, 4 Imprint, Anpario and AB Dynamics could all be good smaller cap companies to hold within a portfolio. The important thing as always is to do your own research.

The key to investing for dividends is to not focus solely on the yield. Looking at total returns and the potential for a share to pay a rising income in the future are also important considerations. National Grid, Reckitt Benckiser and GlobalData all ought to be companies which can grow their shareholder returns and dividend payout. They should do very well in the coming years.

Please note I own shares in National Grid and Reckitt Benckiser and may buy shares in GlobalData in the future.

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You can also see my previous article on why achieving financial independence is like running a marathon here.

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