In this article, we will take a look at the 10 UK dividend growth stocks to consider. To see more such companies, go directly to 5 UK Dividend Growth Stocks to Consider.
While investors in the US cheer the start of a bull market, those in the UK have been under pressure amid data pointing to stubborn inflation and new interest rate hikes. Annual U.K. headline consumer price inflation in May came in at 8.7%, unchanged from April. Analysts were expecting inflation of about 8.4%. Core inflation — excluding energy and food — increased to 6.5% from 6.2%. As a result, the Bank of England raised interest rates from 4.5% to 5%. The bank is expected to continue the rate hikes, which could push the UK economy into recession, according to a latest analysis from Bloomberg Economics. Economists Dan Hanson and Ana Andrade from Bloomberg Economics expect recession to hit the UK if the country goes ahead with a rate hike in November.
“The big risk to our forecast is that the BoE tightens by more than we have assume. In a world where it followed market expectations, which is about 100 bps higher on average over the next three years compared to our forecast, we would expect the economy to be about 1% smaller by 4Q25 with a deeper recession,” the economists said.
But this gloomy outlook could create new opportunities for income investors since dividend stocks are known to perform well during rising interest rates and recessions.
Why Are UK Stocks Undervalued?
Ever since the rising inflation and interest rate hikes started to crush the financial markets, UK stocks have been gaining a lot of attention since they have been performing much better than US equities. Dividend stocks in the UK have also been attracting investors amid their resilience, attractive payouts and dividend safety. In a recent interview with Bloomberg, Rob Arnott, co-founder of Research Affiliates, said despite inflation and rising interest rates, stocks in the UK are cheap and he’d be “fine” with stock ownership in the UK while in the US he does not recommend stock ownership due to valuation and other concerns.
Asked about exactly why he believes UK equities are undervalued, Arnott pointed out to some specifics:
"I love the Schiller PE ratio price relative to 10 year average earnings. It's, it's a, a measure of how much profit the company is likely capable of delivering on a long-term basis. For every £100 you invest and the Schiller PE ratio for the UK last I checked was about 14 times for the US it's about twice that. The US doesn't have a margin for safety, mostly because of the FAANG stocks. The value stocks in the US are about 16,18 times, but in the UK there's a margin of safety. That's great."
Arnott also recommends diversifying portfolios away from mainstream stocks and bonds and moving towards emerging markets where he believes stocks are still cheap just like they are in the UK.
Arnott said in the interview that he is not much bullish on Chinese equities. In fact the reason why he thinks stocks in emerging markets are cheap is linked to Chinese stocks in an interesting way. Here’s how Arnott explained this link:
“They're (Chinese stocks) actually reasonably fully priced by Emerging Market standards. The reason that Emerging Markets value is so astonishingly cheap is that Emerging Markets growth is dominated by the Chinese version of the FAANG stocks, the BAT stocks Baidu, Alibaba, and Tencent. Those three stocks comprised 15% of the Emerging Markets at their peak. Three stocks. And today they comprise about 8% or 10%. Three stocks. They're all on the growth side. So what you're left with is value is very, very cheap and is mostly non-China.”
That valuations in the UK are attractive (for investors) is now a fact that’s hardly challenged. In fact capped valuations is one of the reasons why many UK companies have been mulling listing in the US. Earlier this year, Bloomberg reported that CRH plc (NYSE:CRH) and Softbank-owned Arm Ltd. chose the US for their main listings. The Bloomberg report cited a senior banker who said that “a shift in listings away from London has become the most common talking point among companies, and nearly all their clients with main revenue streams outside Britain were considering a move.”
It seems dividend stocks will never go out of fashion, given the uncertainty in the financial markets and the impeccable track record of dividend stocks. While the Federal Reserve did not increase interest rates in June, it indicated readiness to keep raising interest rates until it achieves its inflation goals. In this backdrop, dividend stocks have become more attractive for investors. Dividend investing lost some ground earlier this year amid a huge market rally following investor hopes that the Federal Reserve might end its rate hikes and inflation could come under control. But some analysts believe dividend stocks are set to make a strong comeback.
In May, analysts at Goldman Sachs in a note recommended investors to pile into select high-yield dividend stocks via call options as potential “catch-up trades.” Some of the notable dividend stocks recommended by Goldman Sachs analysts include Verizon Communications Inc., Philip Morris International Inc. and International Business Machines Corp.
Methodology We scoured the UK dividend stocks universe and picks 10 companies with impeccable dividend growth record and positive growth catalysts.
UK-based Relx PLC (NYSE:RELX) provides analytics and decision tools that enable businesses better anticipate risks. Relx PLC (NYSE:RELX) has a strong record of dividend growth. Its last dividend of $0.466 per share was payable on June 12 for shareholders of record as of April 28. In its fourth-quarter earnings call, Relx PLC (NYSE:RELX) reiterated its dividend growth policy.
"Average acquisition spend over the last five years has been around £600 million, with 2022 a little below that average. Our dividend policy is, over the longer-term, to grow dividends broadly in-line with adjusted earnings per share while targeting cover of at least 2x. Since it fell below 2x in 2020, we have steadily restored cover, while still increasing the dividend. In 2022, we are revising full-year dividend growth of 10%, with cover up to 1.9x."
9. Halma plc (OTC:HLMAF)
Safety equipment company Halma plc (OTC:HLMAF) ranks 9th in our list of UK dividend growth stocks to consider. 2022 marked the 43rd consecutive year of dividend growth of 5% or more for Halma plc (OTC:HLMAF).
In an earnings call back in November 2022, Halma plc (OTC:HLMAF)’s management talked about the company’s dividend growth policies. Here’s what the company said at the time:
“…So this continued combination of growth, a strong balance sheet, and cash generation support an interim dividend increase of 7%, which maintains our long-term progressive dividend policy, and reflects our confidence in the outlook. So all-in-all a good first half for Halma.”
British American Tobacco plc (NYSE:BTI) is a high-yield UK dividend stocks that has investors drooling over its consistent and hefty payouts. British American Tobacco plc (NYSE:BTI) remains resolute when it comes to future dividend growth. British American Tobacco plc (NYSE:BTI)’s management said the following in its earnings call in February.
Finally, in line with our long-standing commitment to dividend growth, we are pleased to announce a dividend of 230.9p for 2022 with growth in line with our constant currency earnings. Looking forward, 2023 results are expected to be driven by another year of strong New Category growth and a further reduction in losses, alongside a resilient combustibles performance, supported by continued efficiency savings and strong cash generation.
British American Tobacco plc (NYSE:BTI) shares recently jumped after the company posted an upbeat trading update. For the full year, British American Tobacco plc (NYSE:BTI) expects to see 3% to 5% organic constant currency revenue growth.
Aerospace and defense company BAE Systems (OTC:BAESY) has decent dividend growth record in addition to enjoying a regular influx of contracts from government and private sector as countries around the world increase their defense spending. BAE Systems (OTC:BAESY) has a dividend yield of about 2.75% as of June 9.
In April, BAE Systems (OTC:BAESY) said it won a $400 million contract from Germany according to which the company will provide the European power with 227 all-terrain BvS10 vehicles.
6. Schroders plc (LSE:SDR.L)
Schroders plc (LSE:SDR.L) ranks 6th in our list of the top UK dividend growth stocks to consider. The asset management company is known for its income fund which has upped its dividends for 27 consecutive years, since it was launched in 1995.
In March 2023, Schroders plc (LSE:SDR.L)’s management touched upon Schroders’ dividend policy in the following words:
“Our dividend payout ratio is now based on our operating earnings per share and our effective tax-rate and operating profit was 17.1%. We expect this to increase to around 20% for 2023, principally as a result of the change in U.K. tax-rate that comes into effect in April. This meant a basic operating earnings per share of GBP0.374 in light of these results tend to reflect our progressive dividend policy, we have declared a final dividend of GBP0.15 per share. This provides a total dividend per share of GBP0.215.”
