Dividend aristocrat is the name given to a US share that have increased their shareholder payout each year for at least 25 years. Dividends are never guaranteed, so a company being able to raise its dividend each year for a quarter of a century is seen as an encouraging sign. It suggests a strong business, and a strong committment to paying dividends. Among shares that would qualify as UK dividend aristocrats, here are two that I would consider buying for my portfolio.
Diageo
The owner of premium brands from Guinness to Talisker, Diageo (LSE: DGE) has the perfect drinks cabinet for a good party. Its shareholders have lots to celebrate too. The company has increased its dividend annually for over three decades. This week it increased its interim dividend yet again, on this occasion by 5%.
The economics of its business lend themselves well to healthy dividends. Demand for drinks tends to stay fairly high. The premium nature of the company’s brands means that it has pricing power. It can use that to offset the risk of ingredient inflation hurting profit margins.
An increasing number of abstainers could hurt revenues and profits in future. Diageo is trying to combat that risk, for example through the launch of alcohol-free Guinness in the UK and buying the non-alcoholic Seedlip brand. It revealed this week that sales in its first half exceeded pre-pandemic levels. While dividends are never assured, I see a strong future for the business and would happily hold it in my portfolio.
DCC
Another company that has raised dividends annually for over 25 years is DCC (LSE: DCC). The energy, healthcare, and technology conglomerate has now raised its payout each year for 27 years in a row.
Like Diageo, business is buoyant. In its first half, DCC revenue grew 26.8% and adjusted earnings per share were up 13.8%. That enabled the company to raise its interim dividend by 7.5%.
DCC’s business may not seem that exciting but its consistently dynamic performance suggests that the business model is finely tuned. The company is a leading supplier of bottled gas in many markets. As demand is resilient and competition is limited, that could remain a highly profitable business for many years. The rise of alternative energy may harm revenues, but that is where DCC’s internal diversification works well in my view. Its businesses do not move in lockstep. So if one underperforms, strong results elsewhere in the company can mean the overall company still grows.
My next move on these UK dividend aristocrats
I would be happy buying both Diageo and DCC for my portfolio. I hope their strong, proven business models can keep generating enough profits to continue their long history of dividend increases. But even if they do not, I feel they are both high-quality businesses with well-identified target markets that look resilient to me. They are the sort of companies I would be content to own in my portfolio for many years to come.
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Christopher Ruane has no position in any of the shares mentioned. 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.
