The UK stock market hosts a broad spectrum of dividend shares, many of which have been increasing their shareholder payouts for decades. These so-called Dividend Aristocrats are a popular choice for income-seeking investors. Their long track record of paying out an ever larger amount each year reinforces their image as extremely safe investments.
Arguably, two of the most popular in the UK are Legal & General (LSE: LGEN) and Imperial Brands (LSE: IMB). Both companies have been rewarding shareholders with dividends for more than two decades. But looking ahead, can they continue to maintain this impressive track record?
A safe lifeline
Legal & General has provided insurance and asset management services to Brits for as long as I can remember. This established household name has roots tracing back to the early 1800s.
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One thing to look for in dividend stocks is a history of increasing payments. L&G really knocks it out of the park here, with 11.3% annualised dividend growth over the past 15 years.
For five years it has focused on a cumulative dividend plan to reward shareholders with £5.9bn in payouts. Now boasting an 8.9% dividend yield, it’s currently the fifth-highest on the FTSE 100.
But the yield is just the start. What impresses me is its market dominance in an industry with steady and continuous growth. With each generation living longer, the demand for insurance-related products is likely to continue increasing.
Of course, nothing is 100% safe when it comes to investing. Markets rise and fall like the sun and the moon and Legal & General is no exception. It’s highly exposed to economic risk, with customers quick to withdraw funds when times get tough.
A look at the price chart reveals the tough declines it endured when the economy struggled. So while dividend payments may be reliable, the price can be a roller-coaster ride not for the faint-hearted.
Moving with the times
Imperial Brands has been making great strides in adapting to changing market conditions. Since rebranding, the tobacco giant has embraced the move towards a more healthy, smoke-free society.
Sure, it’s as much a profit-driven exercise as a moral necessity but it highlights the company’s dedication to success. And a solid track record of steadily increasing dividend payments shows its dedication to its shareholders.
There was a brief cut when the pandemic hit but before that, payments were increasing by 10% per year. With a yield now above 7%, it’s working its way back to pre-Covid highs.
Whether Imperial can adapt to changing times remains to be seen. So its uncertain future makes it a risky investment. There’s no question that harmful tobacco products must be phased out — and they will. But there remains high demand for tobacco-free and smokeless replacements.
From what I can see, Imperial is doing well to meet this demand. It’s up 22% in the past three months yet still has a low price-to-earnings (P/E) ratio of 8.5.
That looks like good value to me.
The bottom line
It’s no surprise that being awarded the title of Dividend Aristocrat is a much-coveted feat that not many companies achieve. The long-term, reliable payments make them attractive options as passive income earners.
But as is the case with any investment, even these seemingly reliable income opportunities carry risks.
