A dividend growth stock refers to a company's stock that not only pays dividends to its shareholders, but also has a history of increasing the amount of those dividends over time.
The ability to consistently increase dividends is often seen as a sign of a company's financial health and stability, suggesting that it is generating growing earnings and has positive future prospects.
We asked five freelance writers for their top suggestions for UK stocks that fit these criteria right now!
Bunzl
What it does: Bunzl supplies a range of essential products through approximately 150 companies worldwide.
By Royston Wild The key to successful dividend investing is finding stocks that can deliver a sustainable and growing dividend over time. In my opinion, FTSE 100 Index-list Bunzl (LSE:BNZL) is one of the best performers on the London Stock Exchange.
The support services business has increased its annual dividend for 31 consecutive years. What's more, it has grown at a healthy compound annual growth rate of around 10% over the period.
Given that Bunzl's share price also soared by around 2,300% during that time, investors who bought in the early 1990s would be sitting on a big wad of cash right now.
The company's strong performance is largely due to its lucrative acquisition-led growth strategy. It is encouraging that it has demonstrated the appetite (and crucially, the strength of its balance sheet) to continue on this hugely successful path as well.
In 2023 alone, it spent £468m on 19 further bolt-on acquisitions. In my view, this is a company with significant long-term investment potential.
Royston Wild does not own any shares in Bunzl.
Dunelm Group
What it does: Dunelm is a homeware retailer that sells through a network of stores in the UK and online, with a focus on value and choice.
By Roland Head. Dunelm Group (LSE: DNLM) doesn't make many headlines in the investment press, but I consider this family-run business to be one of the best retailers in the UK.
Double-digit profit margins and an asset-light business model mean Dunelm generates very high returns on capital, which translates into plenty of excess cash to support generous dividends.
Dunelm's ordinary dividend has grown by an average of 16% per year since its IPO in 2006. The company also regularly pays one-off special dividends.
I often think of family ownership as a sign that a company is run to generate long-term, sustainable profits. I think that's true in this case.
Dunelm's sales could be affected during a recession. I think there is also a risk that growth could slow as the business grows.
However, the valuation seems reasonable to me at this point, with an expected dividend yield of around 4.5%. I plan to be a long-term holder.
Roland Head owns shares in Dunelm Group.
Games workshop
What it does: Games Workshop designs and manufactures miniature figures and tabletop wargames, including War hammer 40,000.
By Ben McPoland. Games workshop (LSE:GAW) is the creator of multiple fantasy worlds loved by millions. The stock also offers the best of both worlds in terms of growth and dividends.
As the firm says, “We return our surplus cash to our owners and we try to do so in ever-increasing amounts.“The dividend yield is 4%, which is substantial considering the stock price has more than doubled over the past five years.
On July 30, the company announced its best annual results ever. It achieved record sales, profits, dividends and employee profit-sharing payments. In the meantime, it is finalizing “Creative Guidelines“to bring your Warhammer 40,000 universe to Amazon Prime. A series of successful films and TV shows could be a powerful catalyst for Games Workshop's growth.
One risk highlighted by the company is its legacy IT system, which “It keeps randomly bothering us and causing temporary problems for us and our customers.These order processing issues could stall your growth plans until you replace your legacy systems.
Over the long term, I believe the combination of growing dividends and consistent earnings growth can help create generational wealth for shareholders.
Ben McPoland owns shares in Games Workshop.
Legal and general
What it does: Legal & General is a UK-based financial services provider specialising in retirement-linked products.
By Christopher Ruane A company that has announced plans to reduce its annual dividend growth rate might not seem like a promising option for trying to build generational wealth.
But I still see two reasons to like the earnings outlook for Legal and general (LSE:LGEN). Firstly, slower growth is still growth. Secondly, with a dividend yield of 8.8% at the moment, the FTSE 100 stock is already a juicy income stock.
The dividend is projected to grow 5% this year and 2% over the next few years. Even if the 2% rate holds for decades, if I bought the stock today, my investment would likely be yielding more than 13% annually two decades from now.
Whether or not this happens depends on the company's trading performance – dividends are never guaranteed. Legal & General cut its payouts during the last financial crisis and remains vulnerable to market volatility, leading clients to withdraw their funds.
But I like their large customer base, high long-term demand, and strong brand.
Christopher Ruane owns shares in Legal & General.
National Network
What it does: National Grid operates energy distribution networks in the UK and the US.
By Alan Oscroft When it comes to generational wealth, we should focus on companies that can continue to operate for decades.
That's why I choose National Network (LSE: NG.).
It seems hard to ignore the strong dividend yield forecasts. Analysts see them as solid for the next few years, although they will start to decline slightly in 2025.
That's where National Grid's dividend might look less attractive than before. The company's recent stock issue diluted cash per share. And, if done once, there must be a chance the company can do it again.
But the question of equity comes down to the growth side of the coin. The company needs to expand and upgrade its networks, as demand for electricity from renewable sources looks set to continue to rise. And that means more costs.
I see more risk than usual in National Grid now, but in the long term, I think it is an option worth considering to pass on to future generations.
Alan Oscroft does not hold any position at National Grid.