Dividend growth has become a much more important issue for many investors now that inflation has risen from 0.5% to 2.6% in the last year. The problem, though, is finding companies with high and reliable dividend growth rates. UK-focused companies come with additional uncertainty surrounding Brexit, for example, which means international stocks may be a better option.
Since emerging markets present a sound long-term growth opportunity, buying companies with significant exposure to the developing world could be a means of accessing high earnings growth. This could translate into rising dividends – particularly in the consumer goods arena via companies such as Unilever (LON:ULVR) and Reckitt Benckiser (LON:RB).
Although the emerging market opportunity for consumer goods companies such as Unilever and Reckitt Benckiser is well-known, both companies are expected to enjoy continued tailwinds over the long run. In China, for example, the consumption of a range of consumer goods is expected to rise at a compound annual growth rate of between 5.3% and 7.6% between now and 2030.
Much of this growth is likely to be due to the expected rise in wages and wealth levels in future years. For example, between now and 2020 the average wage in China is forecast to rise by 26%. Growth in consumption may also increase as the Chinese economy evolves. The development of a more accessible consumer-finance system may allow debt levels to rise, thereby increasing disposable incomes. Similarly, a rebalancing towards consumer spending which could increase consumption as a proportion of GDP may also mean a brighter outlook for consumer goods companies operating in the region.
With Unilever generating the majority of its sales from emerging markets, it could enjoy consistently high earnings growth in the long run. Reckitt Benckiser’s exposure to Asia has also increased after the acquisition of Mead Johnson. This may also have the additional effect of allowing the company to benefit from higher demand for infant nutrition products in China following its decision to reverse the one-child policy.
While Unilever and Reckitt Benckiser have forward dividend yields of 2.9%, they both have significant scope to pay higher dividends in future. As well as from earnings growth, this could be delivered via higher payout ratios. In 2018, Unilever is forecast to grow dividends by over 10%, while Reckitt Benckiser’s payouts are due to increase by almost 12%. Despite this, their payout ratios are forecast to be 66% and 50% respectively next year. This suggests they could raise dividends at a faster pace than profit while allowing for sufficient reinvestment for future growth.
Clearly, it is possible to generate a higher yield from other FTSE 100 stocks at the moment. However, the dividend growth opportunities presented by consumer goods companies which operate in the emerging world appears to be significant. With Unilever and Reckitt Benckiser having modest payout ratios and increasing exposure to the emerging world, they could provide a solution to the threat of higher inflation.
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