Investing in companies that have a strong track record of consistently growing their dividends is a method of selecting shares that strikes a balance between growth and income investing. A growing dividend policy is often seen as a signal of confidence for the companys growth prospects, and this is why many dividend growth stocks also deliver strong capital gains over the long term.
Here are three FTSE 100 stocks with strong dividend growth:
Prudential (LSE: PRU) has a robust track record in delivering growth in earnings and dividends. Dividend payments for the life insurer have consistently grown over the past 11 consecutive years, and the average annual dividend growth rate is 10%.
Although the recent turmoil in emerging markets has hit shares in the Pru, the long-term trend in increased life insurance penetration in emerging Asia remains positive. The Pru also benefits from a high degree of earnings predictability, as life insurance products are, by their nature, longterm and generate profit over a significant number of years.
In addition, the stock trades at compelling valuation multiples. Analysts expect underlying EPS will grow by 14% this year to 110.0p, which implies its forward P/E is 13.7. In the following year, underlying EPS is expected to grow another 9% to 120.5p, and its forward P/E would therefore fall to just 12.4. The stock has a prospective dividend yield of 2.6%
Standard Lifes (LSE: SL) rapidly growing asset management business has meant earnings growth has been booming for the life insurer. The company had been exposed to the governments recent pension changes, but the loss in annuity sales has been more than by growth from the sales of alternative investments.
Standard Life trades at much higher valuation forward earnings multiples than Prudential, with forward P/Es of 17.5 and 14.8, based on analysts expectations on earnings in 2015 and 2016. But, Standard Life makes up for this by its much higher dividend yield and its stronger near-term earnings prospects.
Its stock has a prospective 2015 dividend yield of 4.5%, which analysts expect will rise to 5.1% by 2016. Analysts expect underlying EPS will grow by 48% this year, to 23.3p. And in 2016, underlying EPS is expected to grow another 19% to 27.7p.
Traditionally, dividend growth investors select stocks with a long track record of dividend growth, and this would mean many such investors would prefer to avoid Lloyds Banking Group (LSE: LLOY). But, that could be a mistake. Dividend growth is expected to slow across the overwhelming majority of FTSE 100 stocks, and Lloyds is one of a few stocks that will likely buck that trend.
With PPI and other legacy misconduct costs expected to taper soon, Lloyds is expected to deliver robust earnings growth in the near term. Together with its strong balance sheet and its domestic focus, this should mean the bank would soon be in a strong position to pay more than a majority of its earnings as dividends.
So, although shares in Lloyds currently yield just 1.0%, analysts expect its prospective dividend yield will be 3.4% this year, and 5.2% in 2016.
More dividend ideas…
These five large-cap shares have been selected for their combination of income and growth prospects. Theygenerate stable cash flows from their dominant market positions and broad global exposure.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.