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Research shows that over the long run, dividend growth stocks (those with rising dividends) tend to outperform high-yield dividend payers. Often, dividend growers are able to provide a mix of income and capital gains, which can be a very powerful combination for investors.
Here, I’m going to highlight three dividend growth stocks in the FTSE 100 index. I believe all three are worth considering for a portfolio today.
An alternative investments group
First up, we have 3i Group (LSE: III). It’s an alternative investment company with a focus on private equity and infrastructure investments.
At 2.1%, the yield here isn’t high. But dividend growth in recent years has been excellent.
Over the last five years, the payout has jumped from 35p per share to 73p. That represents growth of more than 100%.
That growth (and strong revenue and earnings growth) has helped to push the share price up. It has climbed about 340% over the last five years, meaning that investors have seen huge overall returns.
I think there’s more to come from 3i. Today, the alternative investment industry is booming and the stock still looks cheap (the price-to-earnings (P/E) ratio is under seven).
That said, this industry can be turbulent at times due to changing financial conditions (interest rates, etc.). So, investors need to be prepared for a bit of share price volatility.
One of the FTSE’s best tech stocks
Next, we have Sage (LSE: SGE). It’s a software company that provides accounting and payroll solutions.
This company has a brilliant track record when it comes to dividend growth. Believe it or not, it has registered more than 20 consecutive annual dividend increases.
The yield here has never been high (currently it’s around 1.8%). But investors haven’t been short-changed – over the last 20 years the stock has delivered share price gains of around 9% per year (meaning total returns have been above 10% per year).
It’s worth pointing out that a lot of Sage’s customers are small and medium-sized businesses. This customer size is a risk because in a downturn, these types of businesses often get hit harder than larger businesses.
I expect this stock to do well over the next decade as the world becomes more digital, however. And trading on a forward-looking P/E ratio of 25, I think it’s worth a look.
An under-the-radar industrial company
Finally, we have Intertek (LSE: ITRK). It provides bespoke safety, inspection, and testing services.
This company has the highest yield of the three. Currently, it’s sitting at about 3.5%.
That’s quite attractive when you consider that the payout is growing at a rapid clip. Over the last decade, it has risen from 52p per share to 157p – roughly tripling!
It’s worth noting that Intertek went through a rough patch growth-wise a few years back. During this phase, the payout was held steady for a few years at 106p per share.
Further growth hiccups can’t be ruled out. However, with management forecasting mid-single digit top-line growth this year along with some profit margin expansion, I believe the stock is worth considering today.
Currently, the stock’s trading on a P/E ratio of 18.7. I think that’s reasonable given this company’s quality.
