10 high-quality FTSE 100 dividend growth stocks

With big dividends at risk, Stockopedia's Ben Hobson finds blue-chips with solid well-covered payouts. 

It's fair to say that the dividends on offer from some of Britain's biggest companies have been mightily impressive in recent years. With payouts forecast to break the £100 billion barrier this year, it's no surprise that high yielding blue chips have been in demand. Yet, it's not all good news...

Last week, the telecoms giant Vodafone (LSE:VOD) said it was cutting its 2019 dividend by 40%. That takes the dividend per share payout from an expected 15 euro cents per share to nine euro cents. That kind of cut was once unthinkable from one of the biggest and best dividend payers in the FTSE 100.

To be fair, Vodafone's dividend cut wasn't entirely unexpected. It's no secret that the demands of its squeezed cashflow have been on the rise in recent years. Its obligations to invest in new 5G infrastructure, reduce debt and cover acquisition costs are just a few of the reasons why its shareholders will be lighter in the pocket this year. 

But of course, Vodafone isn't alone. Another high profile FTSE 100 dividend cut came from Marks & Spencer (LSE:MKS) earlier this year, which set out plans to lop 40% off its payout. Then there are those companies that seem to be teetering on the edge of slicing their payouts. For the most part the City has already decided that cuts are imminent from the telecoms giant BT (LSE:BT.A) and utilities group Centrica (LSE:CNA). Housebuilders such as Persimmon (LSE:PSN) could also be at risk.

Source: Stockopedia

As this table shows, Vodafone  and M&S have already issued their dividend cuts, so their current yields are now lower - at 4.2 and 5.7% respectively. In the case of Vodafone, forecasts are optimistic that the payout will be bumped back up in the future - hence a higher forecast yield for next year. But four separate dividend cuts over the past 10 years and negative dividend cover, means that those forecasts would need careful assessment.

For the other stocks in that table - where dividends are generally forecast to be cut this year - the yields remain very high. High yields like these can be the classic warning signs of a dividend trap.

High yields are widely seen as an indicator that the City doesn't believe that a company has the firepower to pay its dividend. While the situation for each company is different, pressures on cash flow caused by anything from bad management to inclement industry conditions, immediately put dividends at risk. And while company management are usually reluctant to upset shareholders, the City knows that dividends are first for the chop when the pressure is on.

So what happens when you flip these negative dividend measures and instead look for solid FTSE 100 dividend payers? We'd be looking for stocks on more modest yields, with well-covered payouts, a solid track record of dividend growth and forecasts for that to continue.  This is what you find…

Source: Stockopedia

The trade-off  for focusing on dividend growth is that the yields on the stocks will usually be lower. However, here you can see the makings of payouts that are well covered by earnings and have been growing consistently over many years. With few exceptions, the companies here have also performed very strongly in 2019. 

It's perhaps no coincidence that this solid set of dividend stocks are also strongly associated with being high quality, highly profitable and well defended businesses. Companies like the business software developer Sage (LSE:SGE), drinks giant Diageo (LSE:DGE), high-end fashion brand Burberry (LSE:BRBY) and the food group Compass (LSE:CPG), all have the kind of moat-like characteristics that appeal to quality-led investors.

So while the FTSE 100 remains, by a long way, the prime source of dividends in the UK market, it's important to remember that not all income stocks are made equal. High profile cuts this year - and the suggestion that there could be more to come - are a reminder that dividend traps are a real risk when it comes to finding high yields. Taking note of a dividend track record, dividend cover and future forecasts, could be useful extra measures in finding reliable, long-term payers.

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