Three dividend growth stocks that became cash cows

Dividend growth stocks UK

Financial experts often advise that shares as an asset class should generate returns of around 8-10% over a long term investment horizon. However, when held for a significant period of time, dividend growth stocks can literally transform into cash cows, generating this kind of return from yield alone.

The secret is investing in companies that consistently increase their dividend payouts year after year. While a 5-10% dividend increase per year may not make much of a difference in the short term, over 10-15 years the results can be staggering.

Here’s a look at a handful of UK companies that have transformed into cash cows over the last 10-15 years.

British American Tobacco

British American Tobacco (LON:BATS) (BATS.L) has been a dividend growth investor’s dream over the last 15 years. Had an investor bought shares 15 years ago for around 760p, the dividend payout at the time would have been 32p, equating to a yield of 4.2%. However last year, British American Tobacco paid out a dividend of 169.4p per share, meaning that the investor who bought at 760p, would now be enjoying a yield of 22.3% on their original purchase price. A capital gain of 622% would also have been generated.


Utility giant SSE (LON:SSE) (SSE.L) has been another dividend champion, increasing its dividend payout on a consistent basis. Had an investor purchased shares 15 years ago for 670p, the starting yield would have been approximately 4.9%. However last year, SSE paid out dividends of 89.4p, equating to a yield of 13.4% on the original purchase price. The investor would also have notched up a capital gain of 126%.

St. James’s Place

Lastly, wealth manager St. James’s Place (LON:STJ) (STJ.L) has been an excellent dividend growth stock over the last decade. Ten years ago, the shares could be purchased for 430p, with a yield of under 1% at the time. However the company paid out 33p in dividends last year, equating to a 7.7% yield on the original purchase price ten years ago. A capital gain of 178% would also have been recorded over the last decade.

Of course, this is all in hindsight and there is no guarantee that these stocks, or any other stocks will perform like this going forward. But it what does show is that while a 3%-4% dividend yield may not seem like much now, if you can find a company that increases its dividend on a consistent basis, the results can be powerful over the long term. Rising dividend payouts should result in share price appreciation, leading to the all-powerful combination of both capital and dividend growth.


Disclosure: Edward Sheldon, CFA has no position in any shares mentioned in this article. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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