Among the strategies that can richly reward those investors with a bit of patience is dividend growth investing.

At its heart this involves putting money to work in companies that compound their earnings over time and convert a high proportion of profits into the cold, hard cash needed to fund consistent increases in the shareholder reward.

One fan of this investing style is legendary US fund manager Peter Lynch. The value investor who popularised the ‘growth at a reasonable price’ or ‘GARP’ strategy, he managed Fidelity’s Magellan Fund for 13 years. Beginning in 1977 with $20 million in assets, Lynch wound up his tenure in 1990 with more than one million shareholders and assets north of $14 billion. Over this lucrative period for his investors, Lynch delivered a stunning average annual return of just over 29%.

WHY STOCKS DO BETTER THAN BONDS

In his book Beating the Street, Lynch remarks that ‘the reason that stocks do better than bonds is not hard to fathom. As companies grow larger and more profitable, their stockholders share in the increased profits. The dividends are raised.’

Lynch continues: ‘The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row.’

He adds: ‘Whereas companies routinely reward their shareholders with higher dividends, no company in the history of finance, going back as far as the Medicis, has rewarded its bondholders by raising the interest rate on a bond.’

The feted American investor was fascinated by Moody’s Handbook of Dividend Achievers; for the uninitiated, a dividend achiever is a company that has increased dividends for at least 10 years in a row, no mean feat given the vagaries of economic cycles and shocks from ‘Black Swan’ events like the pandemic we’ve all just lived through.

Covid interrupted the long-run dividend growth streaks of many companies around the globe as corporates hunkered down and conserved cash to ensure they survived to see the other side of Covid. A select band of names continued to increase payouts during the pandemic, though investors were forgiving of firms that temporarily suspended payouts during the crisis before quickly reinstating the shareholder reward or resuming progressive dividend policies.

DISCOVER THE DIVIDEND KINGS

Using Stockopedia to search for dividend champions, Shares has scoured the UK and US stock markets for firms that have grown dividends in at least nine out of the last 10 years – this less stringent screen captures companies that may have undergone the briefest of dividend-paying hiatuses – and also boast 10-year dividend compound annual growth rates (CAGR) of 10% or above.

The starting yield on these investments may not be too impressive but their ability to consistently increase payouts could reward investors who are prepared to be patient.

On the UK market this elite cohort includes DCC (DCC), Diploma (DPLM) and Dechra Pharmaceuticals (DPH), a trio with decade-long dividend CAGRs of 11.4%, 14.1% and 14.9% respectively.

Dublin-headquartered distribution firm DCC grew its dividend by 10% to 176p in the year to March 2022, marking a 28th consecutive year of dividend growth, and the £4.8 billion cap is forecast to grow its shareholder reward by 8.2% and 5.6% in 2023 and 2024 respectively, prospective payouts covered almost 2.5 times by earnings according to Stockopedia.

Growing organically and through acquisitions, Johnny Thomson-led Diploma is another distributor with a dividend more than twice covered. Delivering strong free cash flow conversion and boasting a robust balance sheet, the industrials controls, seals and life science equipment supplier actually suspended the half year dividend in May 2020 amid Covid uncertainty, but the total dividend continued to rise.

Resilient veterinary pharmaceuticals giant Dechra continued to increase dividends through Covid and the £3 billion cap has raised its final dividend consistently since 2004.

Another UK dividend champion is Cranswick (CWK), which supplies retailers and food service customers with pork, gourmet sausages, chicken and charcuterie as well as olives, houmous and dips.

Dividend cover north of 2.5 times suggests Cranswick’s growing payout is sustainable and the Hull-headquartered group’s market share gains and earnings growth have translated into a tasty 10-year dividend CAGR of 11.1%. In a testament to its resilience, Cranswick increased its dividend by 8% to 75.6p in a year to March 2022 marred by labour shortages, inflation and supply chain disruption, stretching its unbroken dividend growth record to 32 years.

Based on Stockopedia data, Hikma Pharmaceuticals (HIK) has healthy dividend cover of around 3.5 times, based on estimates for 2022 and 2023, as does another healthcare name, Advanced Medical Solutions (AMS:AIM), the wound care products-to-surgical dressings distributor with forecast dividend cover for 2022 and 2023 north of 4.6 times.

At first glance, cover at Smart Metering Systems’ (SMS:AIM) cover looks quite skinny at sub-0.5 times for 2022 and 2023. And yet the company reported net cash balances of £38.6 million as of 30 June 2022 and upped the dividend by 10% to 20.6p, drawing confidence from a resilient business model underpinned by index-linked recurring cash flows from meter and data assets. However, cover does look light at Avon Protection (AVON), the indebted gas mask manufacturer, at just 0.1 for 2022 and 1.6 for 2023.

WHICH US STOCKS HAVE DELIVERED ON DIVIDENDS?

Investors seeking payout growth across the pond can invest in the ‘Dividend Aristocrats’, S&P 500 companies that have paid and increased their ordinary dividend every year for at least 25 consecutive years.

The likes of consumer goods giants Procter & Gamble (PG:NYSE) and Johnson & Johnson (JNJ:NYSE) as well as Coca-Cola (KO:NYSE) and Hormel Foods (HRL:NYSE) have hiked their dividends every year for over half a century, even if it has been in small annual increments.

US-listed names with at least nine annual hikes over the past decade, yet delivering more sizeable annual dividend increases, include semiconductor-to-infrastructure software products powerhouse Broadcom (AVGO:NASDAQ), a free cash flow monster with a formidable 10-year dividend CAGR of 46.4%.

Payment processor Mastercard (MA:NYSE) has established a decade-long dividend CAGR approaching 30%, and while it has recently been buffeted by headwinds ranging from staff shortages to supply chains squeezes, Tyson Foods (TSN:NYSE), the world’s second largest processor and marketer of chicken, beef and pork, is an income stalwart. Tyson has paid uninterrupted quarterly dividends on its common stock each year since 1977.

iPhone maker Apple (AAPL:NASDAQ) has been generating fantastic returns for investors for a long time and the $2.1 trillion cap enjoys a very loyal customer base prepared to spend on the latest iterations of its iconic handsets, services and wearables.

Admittedly, the weakening consumer backdrop is taking a bite out of iPad and iPhone sales, but Apple’s brand strength and pricing power have translated into a 10-year dividend CAGR approaching 20%. What’s more, the tech colossus’ cash generation – operating cash flow topped $24 billion in the fourth quarter to 24 September 2022 – and enormous $25 billion cash pile should underpin progressive payouts into the future.

Arguably the world’s best-known sportswear brand, Nike (NKE:NYSE) is on the cusp of joining the S&P Dividend Aristocrats and has delivered a 10-year dividend CAGR of 10.1%.

While the sneakers-to-soccer balls brand faces weakening consumer confidence as well as supply chain challenges and issues in China, the strength of its brand should underpin future payouts progression and crucially, Nike also maintains high dividend cover, which suggests it is unlikely to ruin its dividend growth track record any time soon.

Supplying thirsty consumers with their daily caffeine fix is a potentially recession-resistant line of business that has allowed Starbucks (SBUX:NASDAQ) to brew up a tasty 15.2% decade-long dividend CAGR. The coffee roaster and retailer initiated its dividend in 2010 and has increased it for the past 12 years.

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