Since the start of the year, nine FTSE 100 companies have already announced cuts to their dividend payouts. Growth in dividends from the FTSE 100 is now at its slowest pace for many years, leading many income investors to search for yield in foreign and small-/mid-cap stocks. However, dividend investors should not avoid Footsie stocks completely, as there are still quite a few sustainable dividend-growth stocks and many offer attractive valuations, too. Here are my top 4…
Prudential
Life insurer Prudential (LSE: PRU) has a very strong track record of delivering growth in earnings and dividend. Since 2008, underlying EPS has grown by a compound average growth rate (CAGR) of 16.4%, whilst annual dividends have grown by 16.2%. And with earnings covering dividends by 2.6 times, the Pru is in a strong position to sustain further dividend growth for many years to come.
But investors in the Pru need to be careful with the downturn in emerging markets. Slowing growth and the falling values of emerging market currencies will undoubtedly slow the pace of earnings growth. However, it’s not all doom and gloom for the Pru’s fundamentals. The low levels of insurance penetration in emerging markets should mean that premiums would continue to grow faster in emerging markets than in developed markets, even as economic growth slows.
Shares in the Pru have a prospective dividend yield of 2.6%.
Aviva
Aviva (LSE: AV), which has been a laggard in the sector for many years, is seeing a turnaround in trading conditions and profitability. Premiums are returning to growth as economic conditions improve. And, on top of this, its combined ratio — a measure of underwriting profitability — is at its best level in eight years, at 93.1%.
Trading at 10.8 times its expected 2015 earnings, Aviva’s shares are significantly cheaper than shares in the Pru, which trade at 13.8 times their expected earnings. Although this is a reflection of its weaker long-term growth prospects, Aviva is highly cash-generative and is set to deliver superior cash returns to shareholders. Aviva’s prospective dividend yield in 2015 is 4.1%, and analysts expect this will improve further to 4.7% by the following year.
Old Mutual
Old Mutual’s (LSE: OML) shares are also affected by the slowdown in emerging markets. But so far, earnings remain robust, as it continues to experience growth in its banking and asset management businesses. The group is set to report underlying EPS growth of 10% this year, and its shares are currently trading at a forward P/E of  just 10.5. On top of this, its prospective dividend yield is 4.5%, and it has dividend cover of 2.1 times.
Marks and Spencer
It’s not just financials that make great dividend growth stocks. With UK consumer confidence picking up and a relatively robust domestic economy, investors should take a look at retail stocks as well.
Shares in Marks and Spencer (LSE: MKS) carry a prospective dividend yield of 3.7% and dividend cover is 1.8 times. The retailer does not have a perfect track record of delivering dividend growth, having frozen its dividend at 17p per share between 2011 and 2014. But dividends have begun to grow again, as profits are picking up and net debt is falling.Â
Investment banks are bullish on the company, and out of the 26 recommendations, 12 are strong buys, 10 are holds, and only 4 are strong sells.