That is sometimes known as a progressive dividend policy. I like such a policy because not only could it boost my passive income streams, it also suggests that a company’s management has confidence in its business outlook.

But I say “seem committed” because in reality nobody knows what will come next for a company’s dividends. Even a long history of growing dividends is no guarantee that a payout will keep moving up. It might even be slashed – exactly what happened at Imperial Brands several years ago.

Here are a couple of companies that have been increasing their dividends each year for decades. I would consider buying them for my portfolio because I reckon they might keep lifting their payouts in the future.

Cranswick

The meat and food producer Cranswick (LSE: CWK) has been on a tear lately. Consider last year as an example. Revenues were the highest ever. So were profits. So was the dividend.

Despite that, the Cranswick share price has lost over a fifth of its value in the past year. That has pushed the dividend yield up to 2.4%.

Cranswick’s growing dividend is not a new phenomenon. It has raised its annual dividend for 32 years in a row. Nor was the increase last year just tokenistic. At 8%, it was suitably meaty. Over the past decade, the Cranswick dividend has had a compound annual growth rate of 9.7%. I find that highly impressive.

Can Cranswick keep growing dividends?

What excites me most about Cranswick is not its past but its future. As the results demonstrate, the company has developed a highly efficient, consistently profitable business model. I think that could support future dividend increases.

There are risks ahead, such as a lack of abattoir workers pushing up costs and hurting profits. But I would be happy to buy and hold Cranswick in my portfolio.

DCC

Another company I think might be able to extend its impressive record of growing dividends is the conglomerate DCC (LSE: DCC).

It grew its annual dividend in 2021 as it has done for 27 consecutive years. The increase was sizeable, at 10%. The dividend has grown at a compounded annual rate of 9% over the past decade (allowing for a switch from reporting in euros to pounds).

DCC has a collection of businesses that are highly cash generative. Free cash flow last year jumped to £688m. Paying dividends did not even use up a quarter of that cash. So the company is generating a lot of money it can invest in its healthcare and technology divisions. Both recorded double-digit earnings growth last year.

The core energy business also grew profits, but only modestly. A declining demand for gas in some markets is a risk to both revenues and profits at DCC. But I think its mixture of businesses positions the firm well for a changing world. I think it can keep growing dividends and would consider buying it for my portfolio.

DCC

DCC (LSE: DCC) operates in a few different business areas. One that I think should see demand hold up fairly well whatever happens to the economy is energy supply. It sells energy like gas to sites such as homes not connected to the power grid. Ongoing customer demand and a limited number of competitors should help this business keep doing well, in my opinion.

As well as energy, the company operates in other areas such as information technology. Some of these activities will likely perform better than others in a recession. But the spread of businesses and revenue streams gives the firm the benefit of diversification. So even if one part slows down, other divisions may continue to do well.

It has raised its dividend annually for 27 years in a row, with last year’s increase being a chunky 10%. Such growth is never guaranteed, but its appealing business model and proven profit potential could help to support future increases. After the shares fell 17% in the past year, DCC now yields 3.5%.

National Grid

I reckon National Grid (LSE: NG) is also set to benefit from the robust nature of energy demand. Higher prices or tighter budgets may lead some customers to use less electricity. But business and residential properties will still need power. That should help profits at the firm as it owns the infrastructure through which a lot of the nation’s electricity is distributed.

That business model has worked for decades through thick and thin and I see no particular reason for that to change any time soon. There are risks though. The company has been reducing its exposure to gas distribution. This means it could be more sensitive than before to swings in electricity usage. If it falls, the business may see revenues and profits declining too. But with gas demand likely to fall due to environmental rules, I reckon the electricity focus should be the right long-term move for it.

National Grid shares offer me a dividend yield of 4.9%. The dividend has been growing in recent years and is more than covered by earnings, so I see potential for modest future growth.  

Buying recession shares with dividends

I like these companies because I think their business models offer the potential for future profits driven by robust customer demand. That could help support their share prices.

But the prospect of growing dividends also sounds good to me. In a recession, money can get tighter, so passive income streams such as dividends can be particularly helpful. That is why I would consider both of these shares for my portfolio right now.

Diageo

Increasing income could be worth raising a glass to celebrate. When people do that, with drinks from Guinness to Baileys, it helps boost sales at drinks giant Diageo (LSE: DGE).

The company behind many famous names on bar shelves around the world has an attractive record when it comes to boosting dividends. It has done that each year for over three decades. What helps fund this growth? Partly it is the attractive profit margins of the alcoholic beverage industry. But I think Diageo’s careful management and development of a range of premium brands also helps its profitability.

Whether that can continue depends partly on customers being willing to pay for a premium tipple. One risk is a decline in alcohol consumption in some markets, although Diageo is trying to combat that by extending its non-alcoholic offering. I think the firm’s brand portfolio and global reach could be good for future profits – and hopefully dividends too.

DCC

Another consistent dividend grower is DCC (LSE: DCC). The company operates in a variety of businesses including gas distribution.

The dividend has long been a high priority for DCC management. The company has raised its dividend annually for over a quarter of a century. Those rises have been sizeable, with double-digit percentage increases in each of the past couple of years. Currently the yield is 3.1%.

What does the future hold for the dividend? A decline in the use of bottled gas in some markets could hurt both revenues and profits at the firm. But I think its range of businesses helps give it a diversity of income sources. I like the importance DCC attaches to its dividend and would consider buying it for my portfolio.

British American Tobacco

Another company that has raised its dividends annually for decades is British American Tobacco (LSE: BATS).

Lately the increases have been small and the company has started using some of its excess cash to buy back its own shares. But although the growth rate may have slowed, I see ongoing potential for dividend increases at British American. It is a highly cash  generative business.

A risk I would consider here is a declining number of cigarette smokers leading to falls in both sales and earnings. The company is developing non-cigarette product ranges, but so far their profitability looks much less attractive than that of cigarettes. For now at least, there is still enough demand for cigarettes to help support a growing dividend. I see British American among the UK shares to buy now for my portfolio.

Judges Scientific

Judges Scientific (LSE: JDG) manufactures specialist equipment like microscopes. But no such device is needed to measure recent increases in its dividend, as they have been large. Last year, the dividend grew by 20% compared to the prior year. Indeed, the dividend has more than doubled over the past four years.

One risk to the company is ongoing delays in getting access to some sites for installations in markets where pandemic restrictions remain in place. That could hurt sales and profits. I would also like it if Judges had a higher yield – at the moment, it stands at just 0.8%. If my focus was not on yield but on prospects for ongoing dividend growth, though, Judges Scientific would make the list of shares to buy for my portfolio.

Legal & General

With a 7% yield, adding Legal & General to my portfolio could provide a juicy boost to my passive income streams. But I also think the insurer could be a good choice for me when it comes to dividend growth. It has already set out its plans to grow the dividend annually over the next several years.

No dividend is ever guaranteed, of course, and the financial services firm does face risks. For example, changed rules on renewal pricing for insurance policies threatens to dent profits. But I think there is a lot to like about the Legal & General investment case. Its strong brand, large customer base and deep experience could help the company do well in the future.

Cranswick

Meat producer Cranswick (LSE: CWK) may not be a household name, but its products are stocked under a variety of names in many thousands of shops.

Cranswick has spent decades developing its product range. So it is not simply a meat supplier charging commodity prices. Through its processed products, it is able to charge premium prices. That can be good for profits – and dividends.

Indeed, in its preliminary results yesterday, the company announced that it had maintained its operating margin at 7%. I was pleased to see that, as disruption in the meat supply chain is an ongoing threat to profitability. Earnings per share increased by 11%.

The company also announced an 8% increase in its dividend. This is the 32nd consecutive year of dividend increases. I think the company’s strong business prospects bode well for future growth. That is why Cranswick is on my buy list of UK shares.

Unilever

The final name on my list of seven shares to buy is Unilever.

Inflation could push up costs at the consumer goods giant. But that is where I think it can benefit from its portfolio of premium brands, such as Dove, giving it pricing power. Evidence of that came in its first-quarter results. Sales volumes slipped slightly, but revenues grew due to price increases.

Unilever pays quarterly dividends. I think its large, diversified business should provide robust revenues in the next few years even in the face of an economic slowdown. That should help it support dividend increases.

No dividend is ever guaranteed. But by spreading my investment over seven different companies in a diverse range of business sectors, I would hopefully see at least some of them raise their dividends in coming years. That is why I would buy them now.

A top luxury brand

Businesses with luxury brands can be good long-term investments. They often have high profit margins and loyal customers.

There aren’t many UK shares that offer luxury brand exposure, but one that does is Burberry (LSE: BRBY). This business was founded in 1856 and is now a global business with sales of nearly £3bn per year.

Burberry’s share price has fallen recently, probably because markets fear further disruption to overseas sales. China is a key market, but renewed Covid lockdowns could hit local sales and limit overseas tourism — a key source of sales. The Russia-Ukraine war is also a concern.

However, Burberry has survived many major global crises in its 166-year history. My feeling is that the current weakness could be a buying opportunity. Burberry shares currently trade on just 17 times forecast earnings, with a 3% dividend yield. I’ve recently topped up my holding.

UK shares: my top retailer

My second choice also runs shops, but it’s a very different business. Homeware retailer Dunelm Group (LSE: DNLM) is a mass-market business where around 20% of the UK population shop, according to recent figures from the firm.

The founding Adderley family still have a controlling shareholding in Dunelm. While they’re not actively involved in management, I think the business still has many of the attractions of a family-owned firm.

Dunelm has performed well through the pandemic, thanks to strong spending on home improvements. Sales rose by 11% to £796m last year, while pre-tax profit climbed 25% to £141m.

Broker forecasts suggest a similar rate of growth during the current financial year, which ends in June. I suspect we could see a slightly slower performance after that, which could leave the shares looking fully priced on 14 times forecast earnings.

I see this as a short-term headwind, but not a long-term concern. In my view, Dunelm is one of the best UK retail shares. I’m happy to own the stock and recently added more to my ISA portfolio.

I’ve bought this instead of oil

I’m not too sure about the outlook for big oil stocks at the moment. What I’ve been buying instead is FTSE 100 stock DCC (LSE: DCC). This Irish firm is one of the less well-known members of the FTSE 100, but I think it’s an excellent business.

DCC is a distribution specialist that operates in the energy, healthcare, and technology sectors. The majority of profits come from the group’s two energy divisions. These supply LPG, road fuels, and products such as heating oil under brands including Certas Energy and Flogas.

DCC shares have fallen recently, perhaps because the disruption in the energy market could cause problems for firms such as DCC.

Fortunately, DCC management are taking steps to diversify and expand away from oil and gas. In its energy business, DCC is starting to supply lower carbon fuels. Alongside this, the healthcare and technology divisions are growing fast. I see these as long-term opportunities for shareholders.

DCC shares trade on just 12 times 2022-23 forecast earnings, with a 3.2% dividend yield. That’s unusually cheap for this stock, but I think it’s likely to be an opportunity. I’ve been buying DCC shares for my portfolio.

Here are a couple of firms I would consider adding to my portfolio in March for the potential long-term passive income streams they offer.

Direct Line

Insurers are often strong dividend payers. That can make them attractive from a passive income perspective. The business model lends itself to consistently generating surplus cash flow. That can be paid out to shareholders. Indeed, some insurers aim to pay out regular dividends but also, if their cash surplus reaches a certain point, to pay out a special dividend.

From a passive income perspective, I would consider adding Direct Line (LSE: DLG) to my portfolio this March. With the company due to announce its preliminary results on 8 March, it will be coming under more scrutiny than normal in the City. At the interim stage, the company raised its dividend by 3%. Although that is a modest increase, over the long term, regular increases could help increase my passive income streams significantly. Currently, Direct Line offers a yield of 7.5%. I find that very attractive as a potential addition to my dividend portfolio.

As well as being in an attractive business sector generally, I think Direct Line’s long investment in its iconic red telephone logo gives it a marketing advantage over rivals. That could help sustain customer loyalty and profits. One risk to profits the company flagged earlier this year was the increasing cost of second-hand vehicles. I will be keeping an eye on the preliminary results to see whether the company is managing such risks in a way that still enables it to raise the annual dividend.

DCC

Another company I would buy for its passive income potential is the domestic gas and technology conglomerate DCC (LSE: DCC).

With its yield of 2.9%, the company would offer me an attractive but not unusually large passive income stream. But with an eye on the years to come, I think putting DCC in my portfolio now could turn out to be more and more lucrative over time.

Passive income potential

DCC operates in diverse areas. That helps protect it from some of the risks to individual parts of its business. Still, they do exist and if there is a shift away from using gas as an energy source, which could hurt both profits and revenues.

One thing that impresses me is the company’s proven ability to manage its businesses efficiently and generate substantial profits. It has used its successful business model to increase its dividend for 27 years in a row. At the interim stage, the payout grew more than twice as fast as Direct Line’s, by 7.5%. Dividends are never guaranteed at any company. But I do think the potential for continued dividend growth at DCC could make it a rewarding addition to my portfolio.

Diageo

The owner of premium brands from Guinness to Talisker, Diageo (LSE: DGE) has the perfect drinks cabinet for a good party. Its shareholders have lots to celebrate too. The company has increased its dividend annually for over three decades. This week it increased its interim dividend yet again, on this occasion by 5%.

The economics of its business lend themselves well to healthy dividends. Demand for drinks tends to stay fairly high. The premium nature of the company’s brands means that it has pricing power. It can use that to offset the risk of ingredient inflation hurting profit margins.

An increasing number of abstainers could hurt revenues and profits in future. Diageo is trying to combat that risk, for example through the launch of alcohol-free Guinness in the UK and buying the non-alcoholic Seedlip brand. It revealed this week that sales in its first half exceeded pre-pandemic levels. While dividends are never assured, I see a strong future for the business and would happily hold it in my portfolio.

DCC

Another company that has raised dividends annually for over 25 years is DCC (LSE: DCC). The energy, healthcare, and technology conglomerate has now raised its payout each year for 27 years in a row.

Like Diageo, business is buoyant. In its first half, DCC revenue grew 26.8% and adjusted earnings per share were up 13.8%. That enabled the company to raise its interim dividend by 7.5%.

DCC’s business may not seem that exciting but its consistently dynamic performance suggests that the business model is finely tuned. The company is a leading supplier of bottled gas in many markets. As demand is resilient and competition is limited, that could remain a highly profitable business for many years. The rise of alternative energy may harm revenues, but that is where DCC’s internal diversification works well in my view. Its businesses do not move in lockstep. So if one underperforms, strong results elsewhere in the company can mean the overall company still grows.

My next move on these UK dividend aristocrats

I would be happy buying both Diageo and DCC for my portfolio. I hope their strong, proven business models can keep generating enough profits to continue their long history of dividend increases. But even if they do not, I feel they are both high-quality businesses with well-identified target markets that look resilient to me. They are the sort of companies I would be content to own in my portfolio for many years to come.

Instead, I have been focusing on shares I believe fly under the radar for the rest of the market, as these companies may have more potential. Here are three FTSE 100 growth stocks that I would buy today, based on their potential. 

FTSE 100 distribution champion

The first company is the distribution and support sales group DCC (LSE: DCC). Over the past couple of years, this corporation has expanded via a combination of growth and acquisitions. Earnings per share have increased at a compound annual rate of 11% since 2016. 

However, as this is not an exciting tech business, the market seems to be overlooking its potential. The stock is trading at a relatively attractive forward price-to-earnings (P/E) multiple of just 13.6. I think that undervalues the FTSE 100’s growth outlook for the next few years. 

As we advance, some challenges it could face include competition and higher interest rates. Rising rates could make the company’s debt more expensive and reduce profit margins. 

Growth and income

Another FTSE 100 growth stock I would acquire for my portfolio today is ITV (LSE: ITV). This is a company the market loves to hate. Even though the corporation has told investors it expects to report a record sales performance for the second half of 2021, the stock is still trading at the same level it was this time last year. 

I believe this presents an opportunity. At the time of writing, shares in the broadcaster are selling at a forward P/E of 7.7. There is also the potential for income as ITV has promised to restore its dividend this year. Analysts have pencilled in a potential yield of 3.1%. 

Of course, there are a couple of reasons to be sceptical about the group’s growth outlook. It is having to fight off competition from sizeable American streaming groups, which have deeper pockets. These could hit ITV’s advertising revenue, although it is also generating income from these companies at its production arm. 

Favourable environment

Inflation is rising around the world and trying to determine how rising prices will affect individual companies is challenging. However, research shows that consumers seek cheaper products during periods of rising prices.

This suggests the outlook for B&M European Value Retail (LSE: BME) is improving. The FTSE 100 enterprise is looking to capitalise on rising consumer demand for its services by increasing the store count. This strategy has produced results in the past, and I see no reason why the company cannot follow the same playbook as we advance. 

That said, B&M’s growth is far from guaranteed. The retail sector is incredibly competitive. The company could become entangled in a price war with one of its peers. This could have a significant impact on its expansion plans. 

Despite this risk, I am confident consumers will continue to flock to B&M’s offer, suggesting it is one of the best stocks in the FTSE 100 to own in order to ride the inflationary trend.

Here are four passive income ideas I would consider using for my portfolio right now – and why I like them.

Financial services: Legal & General

The multi-coloured umbrella of insurance and financial services provider Legal & General (LSE: LNG) is instantly recognisable to generations of people. That’s good for the business as it helps it to attract and retain customers without needing to spend as much money on marketing as newer market entrants like fintechs.

That’s not the only attractive thing about the company. Its business model, especially in investment management, has enabled it to post strong revenue and profit gains over the past decade. The company has been good at passing this on to shareholders in the form of dividends. Unlike many insurers, it didn’t cancel or postpone its dividend during the pandemic. Currently, the shares offer a dividend yield of 6.2%. The company has also set out plans to keep raising its dividend in coming years. But dividends are never assured and the company does face risks. These include pricing pressure in the insurance market, which could depress profits.

Smoking products: British American Tobacco

Tobacco can be a good source of passive income. Tobacco companies are out of fashion and some investors shun them on ethical grounds. That has deflated share prices, pushing up dividend yields. On top of that, there’s a risk that declining smoking rates in many markets could hurt revenues and profits. That weighs on the share prices of leading UK tobacco companies.

But I still see tobacco companies as good passive income ideas for my portfolio. Consider as an example British American Tobacco (LSE: BATS), a share I hold at the moment. The company owns a portfolio of brands including Lucky Strike. The mixture of brands allows the company to target different markets and a customer base with a range of spending power. Premium brands also give the company pricing power. That means it can rely on brand loyalty to raise prices without damaging sales too much. That’s attractive in any industry, but in one like tobacco where customer demand is declining, it’s imperative to maintain profits. It can also help offset input cost inflation, a risk for the profits of many consumer goods companies right now.

With quarterly dividends and a dividend yield of 8.1%, British American Tobacco is one of my favourite passive income ideas. It has raised its payout annually for over 20 years. It’s also working hard to develop its non-cigarette business, which could help mitigate the revenue and profit impact of declining cigarette sales. But even with its attractive history of raising dividends, they’re never guaranteed.

Energy conglomerate: DCC

While the company flies below the radar of many investors, one of the passive income ideas I would consider for my portfolio is conglomerate DCC (LSE: DCC). It operates in fields ranging from energy distribution to healthcare.

With a yield of 2.6%, DCC is much less rewarding than some of the other names on my list of passive income ideas. So why would I consider buying its shares for my holdings? A look at the track record illustrates what I like about the company. It has been raising its dividend annually for several decades. Nor are these increases tokenistic. Last year, in the midst of the pandemic, the company grew the dividend by 10%.

The reason I like DCC isn’t really its dividend, though, so much as what it says about the business and its future income potential. The company has strong management, a proven business model, and a leading position in markets with high barriers to entry, such as gas distribution. I think that combination of factors could help it produce strong profits for years to come. That can hopefully support a growing dividend.

But there are risks. One is the volatile gas price, which could eat into profits in the gas distribution business depending on how DCC balances its supply contracts and meeting customer demand.

Telecoms: Vodafone

Many people complain about high mobile phone bills. But those bills translate into high profits for many mobile phone companies. That can be rewarding for shareholders.

The fourth of the passive income ideas I would consider for my portfolio at the moment is such a company, Vodafone (LSE: VOD). The well-known mobile phone company benefits from strong brand familiarity and a wide network not only in the UK but also overseas. Bigger demand for services including 5G and flexible working data packages could help the company grow both revenues and profits in coming years. The Vodafone dividend reflects the lucrative nature of this business. The Vodafone yield currently sits at 7%. That’s well above the average for FTSE 100 shares. 

But building and maintaining a phone network is expensive. The Vodafone balance sheet is groaning with debt. The company has already reduced its dividend in the past several years. Further capital spending or debt servicing requirements could lead to another cut.

Putting my passive income ideas to work

One of the reasons some people dream of passive income but don’t achieve it is because they don’t take action.

Investing in UK dividend shares is a simple way to hopefully start generating passive income. I’d consider all four of these ideas for my portfolio today. I already own one of the companies and would consider adding more. I’d also think about buying the other three UK dividend shares, then sitting back and waiting for passive income to start coming my way. I’m happy to receive income while the hard work is done each day by talented employees at leading companies.

Let’s get into the details.

Little-known dividend raiser

The first of the dividend raisers on my UK shares to buy now list is Judges Scientific (LSE: JDG). Like Warren Buffett’s Berkshire Hathaway, Judges is essentially a holding company. It buys up scientific instrument manufacturers, which continue to trade under their own names. That helps them build their reputation. In terms of business approach, Judges – like Berkshire – is also fairly hands off. But by acting as a centralised capital allocator and administrator, it can help the individual companies improve their business processes, without getting in the way.

Like Buffett, Judges is also disciplined in how much it pays for acquisitions. That enables it to grow its business in a way that adds rather than detracts value. That’s not where the comparison with Buffett ends. He often talks about pricing power: the ability to combat inflationary pressures through raising prices. This is easier if a business has a ‘moat’: something that helps it defend itself from competitive attack. Judges has purposefully targeted a business area where quality and precision matter. That can help insulate it against low cost competition.

From profits to dividends

While I like Judges’ similarities to Buffett’s style, I also appreciate one way in which it diverges from the Sage of Omaha: dividends.

Berkshire doesn’t pay dividends. Judges, by contrast, pays them and has consistently raised them. The increase in its most recent full-year dividend was 10%. That’s actually low compared to the company’s recent history. In the prior two years, ordinary dividends had increased 25% annually. On top of that, there was a £2 special dividend for the 2019 financial year.

Dividends are never guaranteed, though, and Judges does have risks. Institutional shutdowns and travel restrictions threaten revenues as its engineers can’t get out to install new instruments. A yield of just 0.7% also raises the issue of whether the share price, now trading at a price-to-earnings ratio of 45, is overvalued. 

UK shares to buy now: DCC

Like Judges, DCC (LSE: DCC) raised its most recent full-year dividend by 10% despite the effects of the pandemic. But that was not a surprise for DCC shareholders: it has raised its dividend by double digits in four out of the past five years, after all. DCC has now clocked 27 years of annual dividend raises in a row. The current yield on DCC shares is 2.5%.

Track record of business performance

Like Judges, DCC is not well known by many investors. The Irish-based, London-listed company is basically a small conglomerate with businesses spanning fuel distribution, healthcare, and technology. Management has proven its ability to grow the business and reward shareholders. But it does face risks. As one of Europe’s largest natural gas distributors, pricing swings and environmental regulations could both eat into profits in coming years. That could hurt dividends.          

Here I explain what the appeal of a dividend aristocrat is to me and examine a couple I would consider buying for my portfolio.

Why UK dividend aristocrats appeal to me

Past dividend performance is not necessarily an indicator of future payouts. Shell, for example, slashed its dividend last year after a 70-year stretch in which it had not cut it at all. Many other previously dividend paying companies also cut, suspended, or cancelled their dividend last year.

Given that, why do I pay special attention to dividend aristocrats? There are two reasons. First, for a company to have been able to raise its dividend regularly over decades suggests that its business model may be resilient and cash generative. Secondly, I think the discipline of raising a dividend annually focusses management’s attention on investor expectations.

Of course, events can change so even a UK dividend aristocrat can find its business model becoming outdated, or new management can adopt a different perspective on dividends. I don’t buy shares just because they are UK dividend aristocrats. But I do use the dividend aristocrat approach as a way of identifying shares that merit further research.

UK dividend aristocrat: Diageo

The first of the two dividend aristocrats I will discuss is better known for its branded products than the company itself. Drinks such as Guinness, Johnnie Walker, and Smirnoff are household names. But the company behind them, Diageo (LSE: DGE), is less famous.

That’s fine because it’s the collection of premium drinks brands that makes the company attractive to me. The branded nature of the portfolio gives the company pricing power. In other words, there is no direct substitute for a brand such as Guinness. So many drinkers who have brand loyalty will likely continue to buy it, even if the company raises the price. That can help to keep the profits rolling in. At a time of rising inflation, pricing power is helpful to maintain profitability. With a post-tax profit last year of £2.8bn, Diageo demonstrates that there is good money to be made in selling alcoholic beverages. That can help to fund a dividend.

The Diageo dividend

Last year, the Diageo dividend was 72.6p per share, which equates to a 2% yield at the current share price. While a 2% yield is attractive to me, it is far from the best on offer among FTSE 100 blue chip shares. Indeed, some tobacco shares offer a yield three or four times higher.

But yield alone is not the only factor to consider when assessing an income share. Last year, for example, the tobacco company Imperial Brands made a swingeing cut to its dividend. While its yield continues to be attractive, it is smaller than it used to be. Imperial had raised its dividend handsomely each year despite its business performing only modestly. A dividend cut thus became all but inevitable.

By contrast, Diageo’s 2% yield may seem fairly small, but it is well-covered by earnings. Last year, for example, basic earnings per share came in at 113.8p. So the dividend was covered 1.6 times from earnings. The company has UK dividend aristocrat status because it has increased its payout each year for 34 successive years. Nor are these increases merely symbolic. Last year, the dividend rose 3.8% from the prior year. That is a significant increase.

Why I’d buy Diageo for my portfolio

One of the things I like about Diageo is that it has both income and growth potential. The dividend offers income potential. But the strong long-term business performance underpinning the dividend also offers growth opportunities. Over the past year, the Diageo share price has increased by a third.

But growth is not assured. One risk for Diageo is an increasing rejection of alcoholic drinks among  younger drinkers. There are also growing restrictions on advertising alcoholic beverages in many markets. Both of these trends could hurt revenue and therefore profits at the company. It has responded by expanding its non-alcoholic offering, with drinks such as Seedlip. But the risk remains – and if profits do fall, the dividend may suffer.

Another UK dividend aristocrat: DCC

Just like Diageo, many people haven’t heard of the company DCC (LSE: DCC). Like Diageo, the Irish-based, London-listed company is a UK dividend aristocrat. It has increased its dividend for 27 consecutive years. It also has a recent history of substantial not tokenistic dividend increases. Last year, the payout rose 10%. In fact, this UK dividend aristocrat has seen double-digit dividend increases in four out of the past five years, which certainly grabs my attention as an investor. At the current DCC share price, the company yields 2.6%.

DCC’s business success has been built on its diversification across a number of industries. One of its best-known businesses is gas distribution. It operates a large gas distribution network across much of Europe and the US, under a variety of local brand names. It also has a healthcare business and a technology services offering.

The benefit of this sort of conglomerate approach is that it allows diversification through the economic cycle: if one division underperforms, another business’s strength may compensate for it. But conglomerates themselves come in and out of fashion with investors. Sometimes it can be hard to understand them because of the mix of businesses. I think this may be one reason DCC is still below many investors’ radar, despite its dividend aristocrat status and strong recent growth in payouts.

I’d consider buying DCC to hold

DCC does have risks. For example, environmental regulations could lead to falling gas demand, which could hurt DCC’s profits substantially. Cost inflation also threatens profit margins in the healthcare business if it cannot be passed on to customers in the form of price rises.

But despite the risks, I find DCC’s dividend outlook attractive. I’d consider buying this UK dividend aristocrat, along with Diageo, and holding it in my portfolio for years.