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Dividend stocks aren’t often known for having tremendous growth potential. After all, businesses offering chunky shareholder payouts are often mature, established enterprises with days of stellar growth in the rearview mirror. But that’s not always the case.
The London Stock Exchange is home to a collection of dividend stocks that still have plenty of growth to offer. And over the last 15 years, this niche collection of businesses has paved the way to staggering passive income as well as capital gains. So much so that investing £100 a month into these types of stocks could set investors on the right track to reaching a seven-figure nest egg.
London’s dividend growers
Most income investors zoom in on dividend stocks offering chunky yields. But in the long run, it’s the companies with relatively low yields that can continuously hike shareholders’ dividends year after year that generate the higher returns.
Three prime examples of this over the last 15 years are the London Stock Exchange Group, Diploma, and Cranswick (LSE:CWK). Each business has continuously hiked its payouts every year since 2010, thanks to the financial flexibility offered by excessive free cash flow generation. As such, the dividend yield at the initial cost is now massively higher.
| Company | Initial Dividend Yield | Current Yield At Initial Cost | Total Return |
| London Stock Exchange Group | 3.1% | 18.4% | +1,517% |
| Diploma | 4.5% | 29.6% | +1,832% |
| Cranswick | 3.1% | 11.3% | +512% |
Combined, an equal-weighted basket portfolio consisting of these three stocks bought in April 2010 would have earned +1,287% total return today. That’s the equivalent of a 19.2% annualised return. And to top things off, assuming dividends continue to be paid, investors would enjoy a massive double-digit dividend yield at the same time.
To put this in perspective, investing £100 a month at this rate of return for 15 years would build a portfolio worth £102,580, far outpacing the FTSE 100.
Too late to buy?
Fifteen years ago, these businesses were far smaller than they are today. And as previously mentioned, larger businesses often struggle to deliver meaningful growth. That’s translated to smaller annual dividend hikes from these three stocks in recent years.
However, at a market-cap of £2.6bn, Cranswick is still a relatively small enterprise compared to the likes of London Stock Exchange Group, which sits at £59bn. So does it still offer value for new investors today? The latest analyst forecasts certainly suggest so.
As a leading British food producer, demand for the firm’s products and services isn’t likely to disappear, especially as the population expands. And with its revenue and operating profits still climbing by double-digits, institutional investors are projecting further dividend growth in the coming years, with the dividend per share expected to reach 101.6p by 2026 – around 13% higher than current levels.
Of course, there are risk factors to consider. The business is susceptible to commodity input costs such as energy and animal feed prices. At the same time, given that the group tends to produce premium foods, an economic downturn could handicap sales volumes, putting pressure on margins.
Nevertheless, as dividend stocks go, Cranswick appears to still have plenty to offer long-term investors. That’s why it might be a business worthy of a closer look.
