Dividends play a crucial role in wealth creation. A study by Hartford Funds showed they contribute almost half of shareholder total returns (share price gains plus dividends) over the long run.
Some of the best shareholder returns are generated by companies that can consistently grow dividends ahead of inflation. These tend to be high-quality businesses with pricing power.
These attributes could become even more beneficial in a world where inflation remains higher for longer, which looks a likely consequence of recent events in the Middle East.
But how can you search for UK companies which have a proven track record of consistently growing dividends? We’ve crunched the numbers and come up with a list.
How we created a list of inflation-busting dividend growers
Using screening tools, we searched the UK largest companies to find those which have demonstrated a consistent track record of increasing dividends faster than the average rate of UK inflation.
Inflation has averaged a smidge above 3% a year over the last decade according to government figures.
We looked for companies with average annual dividend growth over this period which was above this inflation marker and only included names which had increased their dividend in nine out of the last 10 years.
We broadened the scope to those which had increased their payout all but one of the last 10 years rather than every one of those years to reflect the Covid period where many businesses understandably put dividend increases on hold.
We then weeded out companies which had skipped a dividend in any years over the last decade and those where earnings per share do not cover the dividend by at least 1.5 times.
This reduces the risk of a company cutting its dividend and provides headroom for continued dividend growth even in cases where earnings don’t grow as fast.
The resulting list is not intended to be exhaustive nor a guarantee that dividends will continue to grow faster than inflation over the next decade. Nevertheless, these companies have proven their quality through some of the most challenging times.
The last decade has seen the closing then reopening of the global economy during the pandemic, supply chain disruptions, soaring inflation and the invasion of Ukraine.
Key themes running though these companies include predictable cash flows and strong pricing power.
LSEG – more than an exchange
The acquisition of Refinitiv in 2021 transformed the London Stock Exchange from a company heavily reliant on volatile trading fees to a business which generates roughly 70% of its revenues from predictable subscription fees.
By eliminating legacy systems and streamlining costs LSEG has been able to grow profits faster than revenues, allowing the board to commit to aggressive dividend growth even during market downturns.
While LSEG’s dividend yield is relatively low at 1.7%, the company’s progressive dividend policy has allowed it to grow the dividend by around 18% a year.
Cranswick – the quality food producer
Premium meat producer Cranswick is a rarity among FTSE 250 constituents in that it has achieved 35 years of consecutive dividend hikes.
A key factor driving growth has been a deliberate move towards vertical integration. Cranswick controls a sizeable proportion of its supply chain, in addition to processing the meat.
This strategy has created ‘self-sufficiency’ which means Cranswick is less buffeted by wild swings in global commodity prices.
It also means Cranswick can guarantee high welfare animal standards which is coveted by key customers like Marks & Spencer and Waitrose justifying ‘premium’ pricing.
Diploma – the serial acquirer
Specialist value-added distributor Diploma doesn’t just move boxes; it provides essential components and technical expertise to customers.
The components are typically only a small fraction of a customer’s overall cost but often mission critical (like specialist seals) which means Diploma achieves high operating margins of around 25%.
A large chunk of revenue comes from the ‘aftermarket’ where it replaces worn out parts, providing steady, predictable cash flows, which supports a progressive dividend policy.
Diploma complements organic growth through regular ‘bolt-on’ acquisitions of entrepreneurial businesses in fragmented markets, which have typically boosted earnings.
Games Workshop – the FTSE 100 newcomer
Nottingham-based Games Workshop is unusual in that it pays ‘truly excess’ cash flow to shareholders via special dividends on top of normal dividends.
This means total dividends tend to be ‘lumpy’ from year to year, rather than smooth. That said, it is worth pointing out that Games Workshop has never skipped paying a dividend since it joined the stock market in 1994.
Strong cash flow generation has allowed the company to grow dividends by close to 30% a year on average over the last decade. Like Cranswick, Games Workshop operates a vertically integrated business model.
By manufacturing its own fantasy miniatures, the company controls the quality of its products and keeps more of the profit, resulting in high operating margins.
Games Workshop’s army of loyal customers creates a subscription-like revenue stream and predictable cash flows.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
