Revealed - the FTSE 100 firms with the longest runs of dividend increases

27 FTSE 100 firms have increased their dividend every year for at least 10 years:

Source: Thomson Reuters Datastream

“It is intriguing to see that the FTSE 100 firm with the longest dividend growth streak is an investment trust, Scottish Mortgage, which admittedly only joined the index in March," says AJ Bell Investment Director Russ Mould.

“Scottish Mortgage is actually one of 21 investment trust to have increased its dividend every year in the last two decades. This makes a strong case for the investment trust model, as they have permanent capital and are not subject to flows into the fund when markets are doing well and outflows when they are doing badly.

“In addition, investment companies have the ability to smooth dividends, whereby they are allowed to store up to 15% of their annual income on their balance sheet and use these so-called reserves to pay and boost dividends when markets are falling or going nowhere fast.

“Of the other firms with the longest streaks, it is noticeable that none of them necessarily do anything that it seen as exciting or provide go-go growth. SSE is a utility, BAT is a tobacco giant, Sage provides accounting and payroll software and Bunzl distributes essential items to other companies, ranging from mops to syringes to coffee cups.

“Yet all of them have a strong competitive position, a debt pile which is suitable for their type of business and good profit margins, which mean they can throw out plenty of cash flow – and good cash flow can mean good and growing dividends.

“The same lessons apply to chemicals firm Croda, whose competitive position is so strong because it provides products which customers cannot do without and which they can only source from a very limited number of expert suppliers.

“British American Tobacco also has the power of its carefully nurtured brands on its side, something which can also be said of drinks giant Diageo and brands are a key part of their competitive position. Brands can confer pricing power, pricing power can mean fat margins and fat margins can mean good cash flow – and thus good dividends.”

Impact on total returns

• This consistent dividend growth has had a massively positive impact on the total return delivered by those stocks over the past decade
• 13 firms have a compound annual growth rate for their dividend of over 10%
• 4 firms have a CAGR of over 20%...

Source: Thomson Reuters Datastream

“There are three reasons why dividend growth is usually a very good sign for patient, long-term investors.

1. “The ability to pay a dividend of any kind suggests the company is profitable, well-financed and cash generative. Well-run firms will ensure that they have enough money to pay essential bills (salaries, tax, utility bills, suppliers and so on) and will then prioritise investment in the business (capital investment in new equipment) to ensure the firm remains competitive. Only then will they decide what to do with any remaining cash flow and if there is a surplus then they are probably doing something right. As Richard Russell once put it: “A stock dividend is something tangible — it’s not an earnings projection; it’s something solid, in hand. A stock dividend is a true return on the investment. Everything else is hope and speculation.”
2. “A dividend increase is usually a sign of management confidence in current and also future trading. Any chief executive knows that he or she will get asked some extremely stiff questions – and in some cases even lose their jobs – if a dividend is cut, so the decision to increase the pay-out will not be taken lightly if matching the new distribution is going to be a burden in the future.
3. “If a dividend keeps growing, it is likely to drag the share price along for the ride, adding capital gains to income (and the maths becomes particularly potent if dividends are reinvested in the stock as the power compounding then starts to work for the investor).

“Take Croda as an example. In 2007, it paid a dividend of 15.75p and the share price ten years ago was around 660p – equivalent to prospective 2.4% yield.

“That would hardly enthuse many income seekers. But ten years later, Croda paid out a dividend of 74p for 2016 and that equate to a yield of 11.2% on the 660p price of a decade ago.

“If someone though they’d get a safe 11.2% yield then I’d be pretty sure they would be keen to get their hands on it, so no wonder the shares have done so well in the meantime.”

These articles are for information purposes only and are not a personal recommendation or advice.