Is this the best dividend growth stock in the FTSE 100?

Man holding magnifying glass over a document
Man holding magnifying glass over a document

The biggest mistake investors make when hunting for dividend stocks is to settle on companies with the highest dividend yields. However, this tells you nothing about the sustainability of the payout. It is often the case that the higher the yield, the higher the likelihood of a dividend cut.

With this being the case, today I'm looking at two FTSE 100 dividend stocks with some of the best dividend credentials.

Up, up and away

If you are searching for income stocks using yield as your only criteria, Ashtead Group(LSE: AHT) and Intertek(LSE: ITRK) probably won't show up on your radar. But if you screen for companies with the longest record of dividend increases, they will. Ashtead has increased its dividend for nine consecutive years, while Intertek's record is 15 years.

There are only a handful of other companies in the FTSE 100 that can claim the same record.

Aside from their dividend track record, what I also like about these firms is the potential for future dividend growth.

Take Ashtead for example. This international equipment rental company increased its full-year dividend from 1.7p per share in 2009 to 33p for 2018, a compound annual growth rate of approximately 39%.

Despite this growth, there's plenty of room for further dividend expansion. Based on last year's numbers, Ashtead's dividend cover -- the ratio of earnings per share (EPS) to the total dividend per share paid -- was an impressive 3.5. For fiscal 2019, analysts expect this ratio to rise to 4.5.

The same is true for Intertek. Since 2003, the company's annual dividend distribution has increased from 5.2p to 71p (full-year 2018). Dividend cover is 2.1, leaving plenty of room for further payout growth.

Slow and steady wins the race

Earnings growth has been fuel driving dividend growth for both firms. And I see no reason why the trend will come to an end anytime soon.

Over the past decade, Ashtead and Intertek have grown earnings and revenue through a combination of organic growth and acquisitions. The companies have refined the process of buying other businesses at attractive prices and using their experience to cut costs and improve efficiency.

Small acquisitions to boost organic growth may not deliver the explosive returns a large deal could, but the results speak for themselves; this is a strategy that works. Over the past five years, Intertek's EPS have grown at a steady 11.2% per annum. Ashtead has racked up a much faster 35% per annum EPS growth rate.

Over the next two years, City analysts are expecting business as usual. Figures claim Intertek's EPS will remain steady this year, before rising around 9% in 2019. Excluding one-off factors, Ashtead's EPS are projected to leap 55% by 2020.

These numbers put shares in Intertek and Ashtead on a forward P/E of 24.6 and 14.5, respectively. These multiples aren't cheap, but I believe it's worth paying a premium to buy into these companies' growth stories. The shares also support respective dividend yields of 1.9% and 1.6%.

Buy-And-Hold Investing

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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has recommended Intertek. 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.

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