12 High and Rising Blue-Chip Dividends

LONDON -- Income investors don't just look for high yields. They also want shares that they believe will increase dividends.

Company executives often use the dividend as a measure of their success. Companies strive to pay a higher dividend year after year.

I scoured the FTSE 100 (UKX) to find the blue-chip companies that had been increasing shareholder dividends for at least five years. To reduce the chance of finding shares that will cut their dividend, I removed companies that are not expected to increase earnings this year. Of the 32 that remained, there are the 12 with the highest dividend yield.

Company

Price (pence)

Yield (historic, %)

Market cap (in millions of pounds)

GlaxoSmithKline 1,430 5.1 70,370
Centrica 333 4.9 17,276
J Sainsbury 343 4.7 6,466
Imperial Tobacco 2,310 4.6 22,903
British American Tobacco (LSE: BATS.L  ) 3,160 4.1 61,476
Wm Morrison Supermarkets 294 4.0 7,118
Pearson (LSE: PSON.L  ) 1,190 3.6 9,678
British Sky Broadcasting (LSE: BSY.L  ) 726 3.5 12,148
Admiral 1,110 3.5 3,010
Sage 315 3.2 3,969
IMI 960 3.1 3,080
G4S (LSE: GFS.L  ) 266 3.1 3,720

Four stood out to me.

1. G4S
Today, the British public associates G4S with shortcoming and shambles. Its failure to deliver on the Olympic security contract has badly damaged the company's reputation. However, investors would be mistaken to assume that this means shareholders are in for years of depressed returns.

While the Olympics proved a step too far for G4S, the company is still delivering on plenty of business around the world. Much of G4S' work is in the security industry. Customers here are often quite "sticky" -- they are reluctant to switch providers. In an industry where many staff require vetting for security purposes, the costs of replacing G4S with another supplier are high.

G4S has been increasing its shareholder dividend every year since 2005. Growth is expected for the next two years. The consensus forecast is for 3.5% dividend growth for 2012, followed by 9.9% growth for 2014. If these increases come through, G4S shares will yield almost. The investment case is helped further by a forward price-to-earnings ratio of 11. Although the shares have recovered significantly from their recent lows, the current price is undemanding.

2. British Sky Broadcasting (Sky)
Sky is one of the world's leading media companies. In the last five years, Sky has delivered impressive year-on-year sales and dividend growth.

With its last results, Sky confirmed its average customer is paying the company 548 pounds a year, an increase of 10 pounds on last year's figures. The total number of customers also rose, thanks in part to a reduction of customer churn.

Sky continues to innovate. Its NowTV operation is taking on LoveFilm and Netflix. To keep up with Virgin Media, Sky is also rolling out it super-fast broadband offer: Sky Fibre.

The British public's continued appetite for more TV and faster internet looks set to drive Sky forward. Analysts are forecasting a 2.1% rise in earnings per share for 2013, to be followed by a 5.7% rise in 2014. The dividend is forecast to rise more quickly in those two years, by 9.2% and 7.5%, respectively.

3. Pearson
Pearson is probably best known as publisher of the Financial Times and Investors Chronicle. However, the financial publishing arm is dwarfed by Pearson's education business. At the last interim results, FT Group was delivering just 8% of Pearson's total sales.

The largest part of Pearson's revenues come from the North American education division. Here, services range from textbooks to educational and assessment tools. Pearson is also growing fast in the Far East and southeast Asia.

This combination of businesses has helped Pearson deliver substantial sales growth in recent years. The high levels of recurring revenues have made Pearson into a quality income share. In the last five years, Pearson has increased its dividend at an average of 7.5% per year. Another similar rise is expected for 2012. While not expensive, the shares are not cheap, either, currently trading at 14 times the consensus EPS forecast for the year.

4. British American Tobacco
The tobacco industry has long been popular with income investors. With strong brand loyalty and a dedicated (addicted) customer base, sales and profits are among the most reliable on the market.

British American Tobacco has increased its shareholder dividend every year since 1999. In the last five years, the dividend has been raised, on average, by 17.7% per annum. The dividend is expected to continue rising, albeit at a lower rate. Analysts expect a 7.2% dividend rise for 2012, to be followed by a 9.6% rise the year after.

While these figures are impressive, I have concerns over the industry's long-term future. Legislation around smoking is becoming increasingly prohibitive. It is not difficult to imagine a ban on smoking in front of children. The Internet has enabled facts to be disseminated faster. As people become better educated on the long-term effects of cigarette consumption, I expect recruitment rates will fall.

Still, this isn't deterring ace fund manager Neil Woodford from investing in British American Tobacco. This company is one of the top holdings of one of the world's best investors. If you would like to discover more shares Woodford has in his portfolio then check out the free Motley Fool report "8 Shares Held By Britain's Super Investor". This report is 100% free and will be delivered to you inbox straightaway.

Buffett buy signal! The billionaire investor has found an attractive large-cap right here in Britain! Discover what he bought and the price he paid in this special report -- "The One UK Share Warren Buffett Loves" -- it's free.

Further investment opportunities:

David O'Hara does not own shares of the companies mentioned. The Motley Fool owns shares of Netflix. Motley Fool newsletter services have recommended buying shares of and creating a bear put ladder position in Netflix. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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