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It’s tempting to think that the best dividend stocks are those that return the most cash to their owners. But I would politely disagree. This Fool much prefers to see a company returning more money to investors every (or nearly every) year rather than a massive but stagnant payout. The former tends to signal that all is going well. The latter suggests a business is treading water and may prove unsustainable.
Today, I’ve picked out five examples of brilliantly consistent dividend hikers from the UK stock market.
- Wealth manager Rathbones
- Specialist mortgage lender OSB Group
- Investment manager Shroders
- Wealth manager Brooks Macdonald
- Tobacco titan Imperial Brands (LSE: IMB)
Importantly, all five companies have dividend yields of 5% or more. Put another way, they are down to return more cash than either the FTSE 100 or FTSE 250 as things stand (yields of 3% and 3.4% respectively).
This shows that an investor doesn’t necessarily need to sacrifice an above-average yield in return for dividend growth. In fact, a combination of the two might be ideal depending on that person’s financial goals.
Firm favourite
It’s no surprise to see Imperial Brands make the list. Forecast to yield 5.4% in its current financial year, this stock has been a perennial favourite among income investors for as long as I can remember.
Granted, not everyone will feel comfortable owning a stake in a company that makes addictive products that people keep buying. But it’s this very fact that allows Imperial to generate substantial cash flow and consistently raise its distributions (which are paid every three months).
I can see this trend continuing. Back in November, the £25bn cap company announced a 4.6% rise in annual adjusted operating profit to just under £4bn. Helped by higher prices and increased demand for its next generation products, this was a (narrow) beat on analyst expectations.
Cheap for a reason?
Despite rising 20% in the last 12 months, Imperial’s shares still change hands for only nine times forecast earnings. This makes them dirt cheap, at least relative to other companies in the FTSE 100.
Then again, there are definitely a few risks to be aware of.
One reason for the stock’s low price tag is that traditional cigarette sales are slowly declining. While the company hopes that vapes and other new products will fully replace this lost revenue in the long term, there’s no guarantee it will happen.
Even if it does, we can probably expect stricter regulation in time.
My main concern
To return to my original list, I think all of these stocks are worth considering by investors wanting to generate income from their portfolios, including Imperial Brands.
That said, most come from the Financials sector. This could be problematic if the UK economy were to take a tumble in 2026. Yes, the FTSE 100 may have recently breached the magic 10,000 threshold. But we shouldn’t confuse stock market sentiment with conditions ‘on the ground’.
Ultimately, I reckon it makes sense to reduce risk as much as possible by spreading money around all sorts of companies. If one or two are then forced to cut or cancel their dividends, it means that income stream won’t dry up completely.
