When it comes to building long-term wealth through the share market, dividends play an integral role. Many studies have shown that over the long term, dividends make up the vast majority of total shareholder returns and it's the compounding of these dividends that really enables a portfolio to grow strongly in value over time.
Investing in companies that consistently raise their dividends is one of the key aspects of dividend investing and today I look at two FTSE100 companies that have excellent track records of increasing their payouts to shareholders.
Utility giant SSE (LSE: SSE) has a formidable growth track record, having increased its dividend every year since 1999. The company places a strong emphasis on rewarding shareholders and states that "we believe that our first responsibility to shareholders is to give them a return on their investment through the payment of dividends."
It always pays to examine a company's attitude and commitment to its dividend when looking for such stocks, and this kind of statement from management is exactly what dividend hunters want to hear.
The fact that SSE has lifted its payout every year since 1999 means that shareholders will have no doubt enjoyed stellar returns over the long term. For example, had you bought SSE shares 15 years ago for 650p, you would have initially received 30p per share in dividends for FY2001, a starting yield of 4.6%. However fast-forward to FY2016, and SSE's payout is now 89p per share, almost three times that initial one. On the purchase price of 650p, that's now a yield of an amazing 13.7%. By investing in a company that continually increases its dividend and simply holding on for a long time, the stock has turned into an absolute cash cow.
Is it too late to buy now? In my opinion, not at all.
Analysts forecast earnings of 120p for FY2017, which on the current share price, results in a respectable forward looking P/E ratio of 13.2. And with 89p paid out in dividends for FY2016, the stock currently has a lofty yield of 5.6%. It's worth keeping an eye on the dividend coverage ratio, which at 1.3 isn't high, but given SSE's commitment to the payout, I'd back the company to keep delivering sizeable growing dividends going forward.
Tobacco giant Imperial Brands (LSE: IMB) is another stock that has been a golden goose for long-term investors, raising its dividend from 30p per share in FY2001 to 141p for FY2015.
Incredibly, shareholders who bought the stock 15 years ago at 740p, with a starting yield of 4.1%, would now be enjoying a yield of an amazing 19.1%. Add in the fact that the share price itself has increased from 740p in 2001 to around 4,000p today and it's fair to say that Imperial has been a shareholder's dream.
Will Imperial Brands be able to continue to deliver on dividends going forward? City analysts certainly think so with dividends of 155p and 171p forecast for FY2016/17. However investors should bear in mind that with the stock enjoying a strong rise after Brexit, the yield has been pushed down to an underwhelming 3.5%, therefore it might be worth waiting for a better entry point before buying.
45% dividend growth last year
If dividends are what you're looking for, I'd urge you to read this dividend stock report from The Motley Fool: A Top Income Stock.
The UK company listed in the research report currently yields 4%, grew its dividend by 45% last year, and yet miraculously trades on a low P/E of under 10.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.