I’m a big fan of dividend growth stocks when it comes to generating long-term passive income from the market. As it sounds, these are companies with great track records of hiking the amount of cash they return to investors every (or nearly every) year. What’s more, holding these investments inside my Stocks and Shares ISA means this money is shielded from the taxman.
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Tough times
One example has been high-tech instrument, test equipment and software provider Spectris (LSE: SXS).
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This FTSE 250 member has an excellent multi-decade history when it comes to raising its dividends. You don’t manage that without doing a lot of things right.
That said, it’s been pretty tough going for holders lately. The share price has dropped 25% in 2024 alone.
The latest leg down came this month following a poorly received update on trading. On June 19, the company said that it now expected full-year adjusted operating profit to be “at, or marginally below, the bottom end” of analyst expectations of between £232m and £259m. Reasons included weaker demand in China and a slowing of sales of electric vehicles.
Looking cheap!
Glass half-full, this period of stodgy trading has brought the valuation down to what might turn out to be an attractive entry point.
Right now, I can pick up the shares for 15 times forecast FY24 earnings. That’s something of a bargain relative to it’s five-year average of 21.
Of course, there’s always a chance that the share price has further to fall. This is quite possible if trading over the second half of the year proves even more sluggish.
For now, however, I think there are reasons to be optimistic. The most recent final dividend (for FY23) was up 5% up on the previous year. Moreover, the payout for 2024 is expected to be covered well over twice by profit.
The shares currently yield 3%.
Green shoots
Another dividend growth hero has been AIM-listed investment manager Brooks Macdonald (LSE: BRK). It’s been raising its payouts consistently since it first listed on the market back in 2005.
I’m confident this trend will continue, even if the tricky economic conditions since the pandemic have made for a rather volatile share price.
On a positive note, it was announced in April that funds under management stood at £17.9bn by the end of Q3. This was an increase on the £17.6bn held at the end of the previous quarter, thanks to “the improving macroeconomic outlook“.
With this in mind, news of a first cut to interest rates by the Bank of England could see sentiment in minnows like Brooks Macdonald radically improve.
Should this happen, the current valuation of 12 times forecast FY25 earnings will look a steal. Again, this is significantly below the five year average price-to-earnings (P/E) ratio of 21.
Above-average yield
This is not to say that I’d necessarily be in for an easy ride if I bought the shares today. While flat in 2024 to date, I can see the price heading south again if inflation comes back to bite.
Still, the 4.3% dividend yield for the next financial year is higher than most small-cap companies. Although not guaranteed, it’s also likely to be covered twice by earnings.
Like Spectris, I’m considering an investment here when funds become available.
