Many studies have shown that in the long run, dividend growth shares (those consistently increasing their dividends) tend to outperform high-yield dividend shares. So I nearly always go for dividend growth over yield when picking stocks for my portfolio.
Here, I’m going to highlight UK-listed dividend growers that have created substantial wealth for investors in the past. I think these shares are worth considering for a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP) today.
Defence and growth
First up, we have Intertek (LSE: ITRK). It’s an under-the-radar FTSE 100 company that provides bespoke safety, inspection and testing services.
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There’s a lot to like about this company from an investment perspective, to my mind. For a start, it’s relatively defensive in nature. After all, businesses can’t afford to skip crucial quality and safety checks today.
At the same time however, it has plenty of growth potential. This is a company with a high return on capital (ie it’s very profitable). So it’s able to reinvest a lot of its profits for future growth.
Zooming in on the dividend, this company has a good long-term record when it comes to growth, having raised its payout considerably (+143%) over the last decade. It’s worth noting that it held its dividend constant between 2019 and 2022. But the payout’s now well and truly on the up again. In the company’s H1 results, it raised its interim dividend by a whopping 43%. In terms of the yield, it’s roughly 3%, which is healthy.
Of course, a weak global economy’s a risk in the short term. This could lead to a slow down in growth for Intertek.
In the long run however, I think the stock should do well. It’s currently trading on a forward-looking P/E ratio of 19, which I think’s reasonable given the company’s track record when it comes to generating wealth for investors (the stock is up more than 700% over the last 20 years).
Given its stellar track record, I’m thinking about adding this stock to my own portfolio.
One of the UK’s best tech stocks
The other stock I want to highlight is Sage (LSE:SGE). It’s a software company that specialises in accounting and payroll solutions for small- and mid-sized businesses.
Like a lot of software companies, Sage – which has created a lot of wealth for investors over the long run – has seen its share price pull back this year. Year to date, the stock’s down about 12%.
After that pullback, I’m tempted to buy more shares for my portfolio. At current levels, the stock’s trading on a P/E ratio of 24. That’s high by UK standards. But for a high-quality software company with recurring revenues, it’s actually pretty low by global standards (US-listed rival Intuit trades on an earnings multiple of 33).
While the yield here isn’t particularly high at around 2%, this company has an outstanding dividend growth track record. Indeed, it’s raised its payout every single year for over 20 years now.
Again, a weak economy could present some challenges here. This scenario could lead to the collapse of small- and mid-sized businesses and hence less demand for Sage’s solutions.
Taking a long-term view however, I expect it to do well as small organisations move to get up to speed digitally.
