2 stellar dividend growth stocks that could continue to stomp the FTSE 100

These stocks have pleased income and growth investors by rapidly increasing dividends and outperforming the FTSE 100 (NDEXFTSE: UKX) by over 50% in three years.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While many income investors focus primarily on companies already offering high dividend yields, I think investors like myself who are investing for a retirement that will be decades away should also consider stocks that currently offer lower yields but have a proven history of rapidly growing dividend payouts. That’s a great sign of a healthy business.

One such stock is property portal Rightmove (LSE: RMV), which over the past five years has more than doubled its dividend per share from 25p in 2013 to 54p last year. This massive rise in dividend payouts hasn’t translated to a hefty yield though, since the company’s stock has increased a whopping 126% over the period, far outstripping the meagre 16.2% return from the FTSE 100 over the same time.

But I think income investors with a long investing horizon would do well to consider Rightmove despite its low 1.1% headline yield on offer right now. The main reason I’m bullish is that its business is a cash printing machine. Last year it generated £243.3m in revenue while its dominant market position, asset-light business model, and premium pricing power allowed operating profits to rise to £178.2m, representing operating margins of 73%.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

After paying £34.1m in tax, management was able to return substantially all of its profits to shareholders via £49.6m in dividends and £90.8m in share buybacks while still maintaining a healthy net cash position of £25m. Now, Rightmove isn’t cheap at 28 times forward earnings. But I believe this is a premium worth paying for the UK’s dominant property portal that continues to grow sales and profits by double-digits and has huge long-term potential as an income share as management returns ever greater amounts of cash to shareholders. 

Another cash generating king 

It’s a similar story for Auto Trader (LSE: AUTO), which also runs an asset-light, highly scalable platform connecting buyers and sellers, although the product this time is vehicles. Since going public in early 2015, its stock has appreciated a full 64%, again vastly outpacing the FTSE 100’s anaemic 11% return over the same period.

Since then, the company has increased dividends per share from 1.5 in 2016 to 5.9p last year. But, just like Rightmove, Auto Trader has taken a playbook from American publicly listed companies and is more focused on share buybacks, which last year amounted to £96.2m of cash returned to shareholders on top of the £52.2m paid as dividends.

Looking ahead, I see plenty of scope for shareholder returns to continue growing at a rapid clip as management focusses on margin improvements, as operating margins jumped from 65% to 67% last year, and as it pays down the £338.7m in net debt still on the balance sheet thanks to its previous private equity owners.

Auto Trader isn’t cheap with its shares priced at 22 times forward earnings, but again, I believe this is a price worth paying for a firm that controls its market, is consistently growing profits at a double-digit pace and generates huge amounts of cash.

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British Isles on nautical map
Investing Articles

This industrial giant is the UK’s largest business, but it’s not a FTSE 100 stock!

The FTSE 100 index is an obvious place to look for Britain's biggest companies, but the most valuable UK stock…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Here’s a 5-stock FTSE 100 portfolio that could generate £800 a month in passive income

Mark Hartley calculates the potentially lucrative returns of five popular FTSE 100 dividend stocks invested in a Stocks and Shares…

Read more »

Investing Articles

Up 40% in 2025, is this 1 of the best cheap UK shares to consider buying right now?

Looking for UK shares to cash in on the gold rush could be a great idea to consider. Here's one…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Dividend Shares

Is it wrong for me to buy these FTSE 100 tobacco stocks?

These two FTSE 100 tobacco stocks have thrashed the wider UK market over one and five years. But would it…

Read more »

Investing Articles

Is this a great opportunity to lock in big dividend yields for a second income?

Dividend yields rise as share prices fall. That’s why many investors will see a bear market or correction as an…

Read more »

Investing Articles

How much could a 30-year-old ISA investor have if they invested £500 a month until 60?

Generous tax advantages mean Stocks and Shares ISA investors can boost their chances of enjoying an early retirement.

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

After collapsing 28% today, are Bunzl shares too cheap to ignore?

A poor trading statement has sent Bunzl shares to multi-year lows. Could now be a good time to consider investing…

Read more »

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »