The FTSE All-Share index is filled with high-dividend-yield stocks for investors to pick from. And right now, Phoenix Group Holdings currently offers the most generous payout in the top 100 UK businesses at 10.5%. Chasing high-yield opportunities can be rewarding. However, the results can pale in comparison to the gains of some lower-yielding shares in the long run.
The power of dividend growth stocks
Take London Stock Exchange Group (LSE:LSEG) as an example. Right now, if I were to buy shares at their current price, I would only start earning a 1.1% return from dividends. However, the story is very different for those who bought and held all the way back in 2004.
With last year’s dividend per share standing at 115p and the share price in 2004 trading close to 336p, shareholders who held on all this time are now earning a massive 34% yield! Given that the company has hiked dividends once again in 2024, this payout looks like it’s going to continue increasing.
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That’s a useful lesson for anyone considering buying shares that come with a low dividend yield today. If the price rises regularly, it could mean a much bigger yield further down the line.
But back with London Stock Exchange Group, it has had little trouble generating cash flow over the last two decades. As the business powering the British stock market, demand for its financial services and data analytics hasn’t been lacking. And that’s enabled management to continuously hike dividends from 4.42p in 2004 to 115p in 2023 with a forecast for 125p in 2024.
With more money flowing to the bottom line, the share price has also delivered some terrific results. And investors who reinvested all dividends paid over the last 20 years have reaped a ginormous 4,513% total return. On an annualised basis, that’s the equivalent of 21.1% outpacing even Warren Buffett’s track record.
Too late to consider?
Looking at the business today, London Stock Exchange Group continues to show promise, in my opinion. It’s recently entered into a 10-year partnership with Microsoft to integrate its analytics solutions into cloud computing. The goal is to enable customers to gain easy access to all its market data from a single platform rather than going through third-party terminals.
So far, this partnership has started paying dividends of its own, with higher subscription numbers pushing up the group’s bottom line. And providing these trends continue, snapping up its shares today could eventually lead to a far more meaningful yield a decade from now.
Of course, no investment is without its risks. A growing concern surrounding this enterprise is the shrinking number of companies choosing to list their business in London versus other markets such as the US. In fact, since January 2015, the number of publicly traded companies in London has shrunk from 2,429 to 1,775.
From a market capitalisation perspective, the UK stock market is still huge, with an estimated £3.75trn combined market cap. However, suppose UK economic growth remains weak, and companies continue to seek to raise capital in other markets? In that case, London Stock Exchange Group’s impressive track record may start to crumble.
Nevertheless, I remain cautiously optimistic. That’s why I’m currently tempted to add this income-generating business to my portfolio once I have more capital at hand.
