10 shares with long history of double-digit dividend growth

Stockopoedia's Ben Hobson goes in search of companies with attractive and affordable shareholder payouts.

Where to look for double-digit dividend growth after Imperial Brands (LSE:IMB) ditches its payout policy?

News this week that Imperial Brands is ditching a long-held policy of hiking its dividend payout by 10% every year didn't come as much of a surprise. 

For many years, the blue-chip previously known as Imperial Tobacco has been a stalwart income share. It has been part of the UK's dividend landscape, with big, reliable and growing payouts (assuming you could stomach its 'sin stock' status).

But as the market for cigarettes has changed, so too has Imperial's ability to keep up with that policy of double-digit payout growth. The market has long suspected this was the case. Imperial's share price has halved over the past three years. In part, that’s pushed up the yield on the stock from 3.6% to 9.8%. 

It looked attractive, but it had the tell-tale signs of a dividend trap.

Source: Stockoepdia Past performance is not a guide to future performance

To put a stop to this price decline, and get the bad news into the open, Imperial has uncoupled itself from its previous policy. From 2020, rather than a guaranteed 10% rise each year, payouts will be linked to earnings growth. This is a major change of gear for a business that was once a cash cow. It's now having think more innovatively about where future cashflows will come from.

From an investment perspective, changing market conditions haven't yet washed through Imperial's financials. But while the dividend has been increasing, its dividend cover (its ability to cover the payout from current year earnings) has turned negative in recent years - and this was one of the early warning signs.

Source: Stockoepdia  Past performance is not a guide to future performance

In practice, Imperial may well remain a solid income growth stock. As long as the payout continues to rise, it'll stay one of the market's popular 'dividend achievers'. 

But for investors looking around for alternatives, there is a club of stocks in the market that have managed more than nine years of dividend rises with a long-run average growth rate in excess of 10%. 

We refined the list by looking for positive dividend cover (more than 1.4x), with payouts forecast to grow over the next financial year, and reasonable yields of between 3% and 6%.

Source: Stockoepdia

Most of the shares passing these rules belong to mid-cap stocks, and there's certainly a cyclical and more sensitive flavour in the sectors that they come from. 

Beyond that, they're fairly diversified, with the housebuilder Bellway (LSE:BWY) and packaging group DS Smith (LSE:SMDS) up there with firms like the marketing specialist Cello Health (LSE:CLL), homeware retailer Dunelm (LSE:DNLM), Pizza chain Domino's (LSE:DOM), engineering group Meggitt (LSE:MGGT) and social care services business CareTech (LSE:CTH).

Stocks like these, with track records of well-supported dividend growth hold a lot of appeal in parts of the market. Conservative yet progressive dividend policies are attractive to long-term investors who look for the kinds of compounding gains that dividend growth can offer. 

Things do change of course, and dividend growth can falter. As we've seen at Imperial Brands, even the biggest companies are susceptible to the business cycle and changes in industry conditions. Even so, dividend growth can be a pointer to stocks that are confident in their earnings potential and their capacity to deliver rising payouts into the future.

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