Dividend growth stocks have a track record of consistently growing their dividends. These types of stocks are attractive to me for a couple of reasons — first, the dividend. Getting paid a higher dividend each year is good. Second, there should be capital growth. Let’s say a dividend growth stock has a 4% yield on a trailing 12-month basis. The stock paid a dividend of 4p per share and is priced at 100p. Next year the dividend increases to 5p. If investors are still happy with a 4% yield, they will be willing to pay 125p per share now.
So long as the dividend keeps increasing, so should the share price. That’s something I want for my portfolio. So I had a look for top UK dividend growth stocks that I might want to buy for 2022 and beyond.
Screening for dividend growth stocks
I looked for stocks that grew their dividends at a compound annual growth rate (CAGR) greater than 5% measured over five years. Also, I required a CAGR in earnings, again measured over five years, of over 5%. Next, I looked for a less than 60% dividend payout ratio. If at least 40% of earnings are being invested in the business, that should grow future earnings, supporting further dividend increases. I did not want companies paying most of their earnings as dividends.
My screen returned over 30 stocks. I selected two from different industries. The two UK dividend growth stocks that I would consider adding to my portfolio for 2022 and beyond are life-saving technology company Halma (LSE:HLMA) and international distribution and services company Bunzl (LSE:BNZL). Both of these stocks are members of the FTSE 100 index.
FTSE 100 dividend growth stocks
Bunzl certainly has the hallmarks of a UK dividend growth stock. It has grown its dividend at a five-year CAGR of 9.55%. The company has grown through a mixture of organic growth and bolt-on acquisitions. Revenues have been growing well, and earnings have followed. In fact, earnings have grown faster than dividends. This has seen the company’s dividend cover increase over time, giving the dividend a good margin of safety. However, Bunzl shares trade at a price-to-earnings ratio of 18. That is relatively high compared to the industry and wider market. In addition, operating margins are consistent but slim at around 5.5% on average. Slim margins do not allow a lot of room to absorb increasing costs before earnings start to be affected. Growing earnings in part from bolt-on acquisitions require attractive purchases to be available. There is always the chance that these will dry up.
Table 1. Halma and Bunzl: key stock characteristics
| Company | Ticker | Market cap | 5-year dividend CAGR | 5-year earnings CAGR | Trailing 12-month dividend cover | 5-year stock price CAGR |
| Bunzl | BNZL | £9.18bn | 7.3% | 12.8% | 2.49x | 5.6% |
| Halma | HLMA | £9.13bn | 6.6% | 13.3% | 3.81x | 21.2% |
Source: Company accounts and Yahoo finance
Halma has five-year CAGRs for dividend and earnings of 6.6% and 13.3%. Like Bunzl, earnings growth is outstripping dividend growth and has increased the dividend cover to a healthy 3.81 times earnings. That makes the dividend relatively safe. Like Bunzl, Halma grows revenue organically and by sensible bolt-on acquisitions. But, Halma’s operating margin averages closer to 18%. Again, revenue growth at Halma is partly dependent on being able to find attractive bolt-on acquisitions, which may not always be possible.
I would consider adding Halma and Bunzl to my portfolio for their potential as long-term dividend growth stocks