UK inflation’s come down recently. However, prices throughout the economy are still rising. The good news for income investors is that many UK stocks are lifting their dividends at a much higher rate than inflation. One great example here is BAE Systems (LSE: BA.)
Over the last three full financial years, the defence company has hiked its payout from 23.7p per share to 30p per share. That represents growth of a brilliant 26.6% or 8.2% a year.
Looking ahead, analysts expect the payout to rise another 7.3% this year (more than triple the rate of inflation today) to 32.2p. That translates to a yield of about 2.5% at the current share price.
Should you invest £1,000 in BAE Systems right now?
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Defence spending should remain elevated
Is the stock worth considering today? I think so. The valuation seems reasonable at the moment. Currently, the forward-looking price-to-earnings (P/E) ratio’s 17.
Meanwhile, in the years ahead, government spending on defence (BAE Systems’ customers include the UK, US, Australian, and Saudi Arabian governments) should remain robust given the high level of geopolitical tension/conflict globally.
Of course, there are no guarantees that governments will continue to spend on defence. Additionally, if geopolitical tensions were to ease, the stock could see some profit taking. In this scenario, the share price could fall.
Taking a five-year view however, I think the outlook’s attractive.
A dividend growth star
Another company that’s raising its shareholder payout aggressively is Coca-Cola HBC (LSE: CCH). It’s a bottling partner of the famous Coca-Cola.
This company has a magnificent track record when it comes to dividend growth. Since it came to the London Stock Exchange in 2013, it’s raised its payout every single year.
Over the last three years, the payout’s jumped from 64 euro cents to 93 euro cents per share. That equates to growth of 45%. This year, analysts expect a payout of 101 euro cents (8.6% higher than the year before) per share, which translates to a yield of about 3.2% today.
The perfect stock right now?
I reckon this is the perfect type of stock to consider buying in today’s uncertain environment. It’s relatively defensive in nature as appetite for its products is likely to remain fairly stable going forward. I can’t see demand for Coke and Sprite suddenly falling off a cliff.
Meanwhile, the valuation’s quite low. Currently, the P/E ratio’s just 13 using next year’s earnings per share forecast. So there’s potential for share price gains in the medium to long term.
Of course, this stock isn’t bullet-proof. No stock is. And one risk to consider is the boycotting of US brands by some consumers in the Middle East. Recently, some consumers in this region have been shunning Coke and turning to domestic soft drinks brands.
This company has a vast geographic footprint however, with no single country dominating its portfolio. So I’m bullish on the long-term outlook.
