Dividend growth investing is a powerful investment strategy that is capable of not only generating an increasing income stream, but also prolific capital gains. That’s because, as a company lifts its payout over time, it tends to put upwards pressure on the company’s share price.
With that in mind, here’s a look at two under-the-radar companies that have grown their dividends by an annualised rate of over 15% per year over the last five years.
DS Smith (LON: SMDS) (SMDS.L) is a leading provider of packaging solutions.
The company has enjoyed strong growth in both revenues and earnings over the last five years. Revenue has risen from £1,969 to £4,781m and net profit has surged from £79m to £209m.
This healthy trend in profitability has enabled the group to lift its dividend at an impressive rate. Indeed, the payout has been increased from 5.9p in FY2012 to 15.2p for FY2017, a compound annual growth rate (CAGR) of 20.8%. City analysts expect growth of 5.6% and 8.4% this year and next. Dividend coverage this year is expected to be around 2.1 times.
However, investors in DS Smith have not only enjoyed a steady stream of increasing dividends; they have also been rewarded with strong capital growth. Over the last five years, DS Smith shares have risen from around 200p to 516p today, a gain of almost 160%. That’s the power of dividend growth.
Is it too late to buy shares in DS Smith now? I don’t believe so. A forward looking P/E of 15.6 looks very reasonable to me and the company’s momentum looks set to continue, with Chief Executive Miles Roberts stating in a trading update recently:
“We are pleased with the consistently strong organic progress of the business. Customers continue to demand high-quality, innovative packaging on a multi-national basis and we have the scale and expertise to serve them. We have also strengthened our business model further through selective acquisitions, in Europe and US, driven by customer demand. As such, we view the future with confidence.”
However, while the valuation looks reasonable, the strong performance of the share price has pushed the prospective dividend yield down to 3.1%. Ideally, I’d like to pick up a slightly higher yield, so I’ll be waiting for a pullback before adding to my holding here.
Another company that has lifted its dividend at a formidable rate over the last five years is WPP (LON: WPP) (WPP.L). Between FY2011 and FY2016, the advertising giant increased its payout from 24.6p to 56.6p, a CAGR of 18.1%.
Over the five-year period, WPP shares have performed well, rising around 60%. Having said that, the shares have endured a torrid time this year. With companies across the globe focusing on cost cutting, advertising companies are struggling at present. Sentiment towards the sector is extremely low, with investors concerned that Google and Facebook will destroy the advertising industry. As a result, WPP shares have fallen from over 1,900p earlier this year, to 1,300p, a decline of over 30%.
Has that fall created an opportunity for long-term dividend investors? I believe it has, and I took the opportunity to buy some shares in WPP recently. I’m down on my position, but have already received my first dividend from the company.
WPP is forecast to pay 60.8p in dividends this year, which equates to a yield of 4.7% at the current share price. City analysts currently expect 5% growth next year. A forward looking P/E ratio of 10.8 looks very cheap for a company with a long-term track record of generating shareholder value. Analysts at UBS recently listed WPP as one of their top stocks for next year.
The company expects like-for-like revenue and net sales growth to be broadly flat for the full year, so I’m not expecting its financial performance to pick up in a hurry. However, with WPP having strong exposure to both digital advertising (over 40% of sales) and the emerging markets (30% of sales) I like the long-term story here. WPP is targeting annual headline diluted EPS growth of 10% to 15% per year, from a combination of revenue growth, margin expansion, acquisitions and share buy-backs.
Disclosure: Edward Sheldon, CFA owns shares in DS Smith and WPP.
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.