UK Markets open in 4 hrs 54 mins

Forget a Cash ISA! I’d buy these 2 FTSE 100 dividend growth stocks in a Shares ISA or SIPP today

Peter Stephens
Arrowings ascending on a chalkboard

While the income returns on Cash ISAs may have improved over recent months, they offer an average interest rate of just 1%. Since this rate of return is behind inflation, it means that your savings could be losing their spending power.

By contrast, the FTSE 100 offers a variety of companies that have improving income prospects. When purchased in a Stocks and Shares ISA or a SIPP, they could deliver impressive long-term income prospects.

With that in mind, here are two large-cap shares that could deliver improving dividend investing prospects.

Compass Group

While support services company Compass Group (LSE: CPG) may offer a dividend yield of just 1.9% at the present time, its potential to rapidly raise dividends is high.

In the last four years, for example, the company has been able to increase shareholder payouts at an annualised rate of over 9%. This growth rate has been catalysed by the company’s rising bottom line, with its net profit increasing at a double-digit pace in all but one year during the period.

Compass Group offers a high degree of consistency in terms of its financial performance. This is partly due to its geographical diversity, with it having exposure to a wide range of markets that reduce its overall risk.

Looking ahead, the company is expected to post a rise in net profit of 9% in the current year. This is forecast to lead to an increase in dividends per share of around 6%, which is significantly above inflation and suggests that the company’s income investing prospects could improve over the long run.

Barclays

Another FTSE 100 stock that is expected to deliver a rising dividend over the long run is Barclays (LSE: BARC). Although its dividend was cut by more than 50% in 2016 in order to strengthen its financial position, the company has subsequently decided to increase dividends at a rapid rate.

In the last financial year, for example, dividends increased from 3p per share to 6.5p per share. Further growth is expected in the current year, with the company’s dividends per share expected to reach 7.9p. This puts the stock on a forward yield of 5.7% after what has been a disappointing period for its share price.

While there may be further uncertainty ahead for Barclays and the wider banking sector due to risks such as a global trade war and Brexit, the company’s income investing prospects appear to be improving.

Since the stock trades on a price-to-earnings (P/E) ratio of around 6 and is expected to post a rise in net profit in the current year, it may offer a favourable risk/reward ratio. While it may not have a strong track record of dividend growth and remains an unloved stock among investors, the long-term dividend growth potential of the business may prove to be relatively high.

More reading

Peter Stephens owns shares of Barclays. The Motley Fool UK has recommended Barclays and Compass Group. 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