The recent stock market volatility has offered investors the chance to give their dividend income a boost. And I’ve been taking advantage with my own portfolio.
I see dividends as part of a bigger picture, rather than the sole focus of my investing. But, it hasn’t escaped my attention that my passive income is set for a boost.
Bunzl
Shares in FTSE 100 distribution firm Bunzl (LSE:BNZL) have a dividend yield of around 2.5%. That doesn’t sound like much, but I’ve got an eye on the long term.
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Between now and 2027, Bunzl is set to invest £700m a year into growing via acquisitions. If it can’t do this, the firm is to use the cash for dividends and share buybacks.
At today’s prices, that’s 7% of the firm’s market value. So I’m expecting at least that in terms of annual growth for the next few years – and I think it could well be much more.
Growing through acquisitions can be a risky business and making a mistake can set a company back years. Rentokil, for example, is still working through an acquisition from 2022.
In general though, buying businesses is riskier when they’re either large in size or involve the acquirer taking on significant debt. But I think Bunzl should be able to avoid this.
The FTSE 100 firm operates in an industry where competition is mostly fragmented. This should give it the chance to make relatively small acquisitions using its cash rather than debt.
Bunzl consistently achieves returns on invested capital of around 15%, which is a strong result. And I think the fragmented nature of the market means there’s a good chance this continues.
Tristel
I’ve also been adding to my investment in Tristel (LSE:TSTL). With a market cap of £153m, this one is at the other end of the scale to Bunzl, but I think it also has some impressive prospects.
The company makes chlorine dioxide wipes and foams for medical settings (equipment and surfaces). These are quicker and more effective than other decontamination methods.
Tristel is currently looking at US expansion. The firm has approval for its ultrasound wipes and is expecting to achieve the same for its ophthalmic product this year.
That could be a huge opportunity. But the biggest risk for investors might not be the inherent uncertainty in getting the product signed off by regulators.
Tristel’s products are very good, but they’re also expensive and it’s looking to break into a market that has some well-entrenched practices. This won’t be straightforward, by any means.
Right now, however, the stock has a dividend yield of 4.5%. And the company has committed to growing this by 5% each year in the near term – regardless of what happens with the business.
I take that as a sign that – unlike Bunzl – Tristel doesn’t need to use its cash to finance its growth prospects. That makes it very attractive from my perspective.
Investing well
When it comes to investing, the thing to do is to focus on the underlying business first and foremost. Get that bit right and the dividends will follow.
Bunzl and Tristel are very different companies. But I’m optimistic about strong returns from both and I think their dividends will grow.
