With the interest rates on savings accounts being low, now could be a good time to consider FTSE 100 dividend growth shares. In many cases, they offer favourable risk/reward ratios that could produce high total returns for investors.
With that in mind, here are two large-cap shares that appear to have sound growth strategies. They may not have the highest yields in the index, but their dividend growth rates could mean that they offer long-term income potential. As such, now could be the right time to buy them in a tax-efficient account such as a Stocks and Shares ISA.
Beverages company Diageo (LSE: DGE) recently released an upbeat assessment of its performance in the current financial year. The business has made further progress in delivering on its overall growth strategy, with its net sales growth expected to be between 4% and 6% in the current year.
The business has long-term growth potential due in part to its exposure to emerging economies. Consumer demand for its premium alcoholic drinks is likely to increase as they become increasingly affordable across the world economy. Since it has a diverse portfolio of products, it offers relatively low risks as customer tastes inevitably change.
Although Diageo currently yields just 2.4%, its dividend could grow at a fast pace over the coming years. It is covered twice by net profit, and may benefit from a bottom line that is forecast to grow at a high-single-digit rate year-on-year. Furthermore, with the company’s financial performance having been resilient despite varied economic challenges in the past, it may provide a sustainable rate of growth as the world economy faces an uncertain future.
Also offering scope for a fast pace of dividend growth is FTSE 100 company Whitbread (LSE: WTB). The company’s recent interim results highlighted the progress it is making in expanding its presence in the UK and in international markets.
For example, it has 90,000 open and committed rooms in the UK, and 8,000 open and committed rooms in Germany. Its international expansion not only offers growth potential, but may also lead to a more diverse business that is less reliant on the UK economy.
Although Whitbread has experienced challenging trading conditions in recent months, its cost reduction strategy has offset much of this weakness. It is aiming to further improve its efficiency, which could strengthen its financial outlook.
The company’s dividend yield is currently 2.1%. While this is relatively low, it is due to increase dividends per share by 9% next year. Its bottom line growth forecasts of 19% in the current year and next year suggest that a fast pace of dividend growth could be ahead. This may improve the income outlook for its investors, as well as catalyse its share price over the coming years. As such, now could be the right time to buy a slice of the business.
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Peter Stephens owns shares of Diageo and Whitbread. The Motley Fool UK has recommended Diageo. 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.
Motley Fool UK 2019