The foundation for investment success can be embarrassingly simple: Buy high-quality dividend stocks, reinvest the dividends, and hold them for decades. This unleashes the power of compounding and can generate powerful wealth over the long term.
With that in mind, today I'm looking at two FTSE 100 dividend-growth stocks that I believe have the potential to provide an income stream for life.
£47bn market-cap Prudential(LSE: PRU) is the largest insurer in the FTSE 100, serving 24m customers across the UK, the US and Asia. I rate the company highly and believe it has the potential to reward investors handsomely over the long term.
One reason I'm bullish on the investment case is the company's emerging markets prospects. Prudential generates 30% of its earnings from Asia, a region that is set to enjoy an incredible rise in wealth over the coming decades. The financial services specialist has been operating in Asia for over 90 years now and has built up high-performing businesses with a widely recognised brand, and multichannel distribution. With millions of citizens in countries such as China, Taiwan and Malaysia set to enter the world's middle class in coming years, demand for Prudential's savings and protection products should remain strong.
Prudential doesn't have the highest dividend yield in the FTSE 100, at just 2.4%, but the insurer has recorded 12 consecutive years of dividend growth. The payout is also nicely covered by earnings, indicating that there's little chance of a dividend cut. City analysts expect dividend growth of 7% for 2018.
Turning to the valuation, analysts currently forecast earnings of 151.2p per share for 2018, placing the stock on a forward-looking P/E ratio of just 12.1. That's a very reasonable price to pay for a slice of this high-quality business, in my view.
Another stock I rate highly for its long-term prospects is defence giant BAE Systems(LSE: BA). Being a weapons manufacturer, the stock won't suit everybody. You're unlikely to find this company held within 'ethical' portfolios. However, if you believe that the demand for defence will remain robust due the ever-increasing rise in geopolitical uncertainty, then BAE could be a good stock to capitalise on the theme.
BAE Systems builds fighter jets and military ships, as well as electronic products such as radars. It also has a growing cybersecurity arm, a division I expect to perform well going forward due to the exponential growth of cybercrime. The company generates a large proportion of sales from the US, meaning that it's well placed to benefit from Donald Trump's defence spending boom.
The dividend yield from the stock is currently a healthy 3.7% and the company has a solid track record of increasing the payout, even if dividend growth isn't prolific. The payout for 2018 is anticipated to be covered twice by earnings.
In June last year, the shares were changing hands for 680p. However, today they can be purchased for 590p. At that price, the forward P/E is an undemanding 13.4, a valuation that looks very fair to me.
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Edward Sheldon owns shares in BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.