Consistent dividend growth is something that many dividend investors look for, and dividend champions are companies that have achieved it for 25 years or more.
However, it's an extremely difficult feat to achieve and as a result, there are very few dividend champions in the FTSE All-Share.
To get around this problem, I'm going to temporarily redefine dividend champions as companies with a ten-year record of unbroken dividend growth. In the FTSE All-Share, there are about 40 such "mini" dividend champions, which I think is a good number to work with.
In addition, I'm going to limit that list to five companies with the highest levels of profitability, measured using average ten-year return on capital employed (ROCE).
Why? Because combined with consistent dividend growth, I think consistently high profitability is an excellent way to search for high quality companies with sustainable competitive advantages. And those are exactly the sort of companies that have a good chance of prospering long into the future.
So without further ado, here is that list of five highly profitable mini dividend champions:
1: WH Smith (OTC:WHSTY) - FTSE 250 - General retailer (cyclical)
- Share price: 1778p
- Dividend yield: 2.5%
- Ten-year overall growth rate: 8.6%
- Ten-year average ROCE: 47.4%
Share buybacks have helped fuel earnings and dividend growth despite a lack of revenue growth
I'm always amazed by how successful WH Smith has been in recent years. My gut reaction is that it seems like a dead-end business selling stationary, books and magazines, all of which can be bought online or in supermarkets.
Obviously, my gut reaction is wrong and is probably based on memories of me buying 12 inch singles in shoddy WH Smith stores as a teenager.
Although the company has been very successful, the picture is somewhat mixed; total revenues have gone nowhere in the last decade, while earnings and dividends per share have more than doubled.
That unusual feature is largely explained by a combination of share buybacks - with the total number of shares almost halving in the period - and improving profitability, probably due to the company's relentless focus on cost-cutting and efficiency.
And speaking of profitability, the figure of 47% ROCE is somewhat misleading because WH Smith is a retailer. Most retailers rent their shops, so although the shop is capital employed within the business, it doesn't show up on the balance sheet. This makes the capital employed figure lower and therefore the return on capital employed figure higher.
However, even amongst retailers, WH Smith's ROCE is very high and consistent and continues to improve.
2: Dunelm Group (OTCPK:DNLMY) - FTSE 250 - General retailer (cyclical)
- Share price: 625p
- Dividend yield: 4.0%
- Ten-year overall growth rate: 16.2%
- Ten-year average ROCE: 38.3%
Results don't get much more consistent than this
Dunelm is the UK's leading retailer of curtains, duvets, cushions and such, and is a favourite with my wife. I have never set foot in one of the company's stores, but it is a holding in the UKVI model portfolio and my personal portfolio as well.
Why? Because I like the fact that it's a dominant market leader, it has a very good record of growth and profitability, and it has very little in the way of debt or pension liabilities.
Like WH Smith, Dunelm is a retainer with rented premises, so ROCE is skewed upwards somewhat. However, I'm aware of that and don't have a problem with it.
I also like its market-beating dividend yield of around 4%. This, I think, is mostly down to other investors being worried about a slowdown in the homewares market and the UK retail market as a whole.
3: Dominos Pizza UK (OTC:DPUKF) - FTSE 250 - Travel & Leisure (cyclical)
- Share price: 325p
- Dividend yield: 2.5%
- Ten-year overall growth rate: 15.7%
- Ten-year average ROCE: 38.0%
A perfect ten-year record of increasing revenues, earnings and dividends
I have wanted to own a slice of Dominos Pizza for a very long time, but its high price has always ruled it out (apologies for the terrible pun, but I could not resist).
However, with a share price that has been flat for almost two years, Dominos Pizza UK is becoming ever more interesting.
In terms of the company, it's the UK & Ireland master franchise of the famous US pizza brand, and has been operating here for around 25 years.
Its track record is almost too good to be true; the company has grown with incredible pace and consistency for years.
In the last decade, it tripled in size whilst pulling off the almost impossible feat of growing revenues, earnings and dividends in every single year (as has Dunelm).
4: Paypoint (OTC:PYPTY) - FTSE 250 - Support Services (cyclical)
- Share price: 1015p
- Dividend yield: 4.2%
- Ten-year overall growth rate: 7.7%
- Ten-year average ROCE: 33.9%
Another company lacking revenue growth which could eventually become a problem
Paypoint offers a dizzying variety of payment-related solutions for local retailers based primarily on its electronic point of sale system (a very modern electronic till, effectively).
The till gives a store's customers the ability to pay for shopping, pay electricity bills, transfer money, buy bus tickets, pay for parking, top up mobile phones and all manner of other day-to-day payment-related tasks.
The company has performed exceptionally well for many years, although this is another example where revenue growth is lacking. Growth from increasing productivity, profitability and margins is all well and good, but revenue growth is still an absolute pre-requisite for long-term sustainable growth.
The share price has been flat for almost four years as investors have become gradually less enthusiastic about Paypoint, and today the yield on offer is now above the market average at 4%.
Another attractive feature is that Paypoint is virtually debt-free.
5: Rotork (OTCPK:RTOXY) - FTSE 250 - Industrial Engineering (cyclical)
- Share price: 251p
- Dividend yield: 2.0%
- Ten-year overall growth rate: 7.7%
- Ten-year average ROCE: 27.8%
Slowing dividend growth and falling earnings; can Rotork turn things around?
Rotork is the world's leading designer and manufacturer of actuators and flow control hardware, for gasses and liquids.
It's one of those hidden champion companies, with a strong brand in a niche market, manufacturing relatively low cost items where quality, reliability and a trusted supplier are far more important than price alone.
Hidden champions are often predictable businesses with high profitability relative to other less-trusted competitors.
As you can see from the chart, though, being a hidden champion and dividend champion is no guarantee of unending growth, and Rotork has suffered some setbacks in the last couple of years.
The reason is mostly down to low oil prices, which have caused a massive reduction in the amount of engineering work going on in the oil and gas industry; an industry which accounts for about half of Rotork's revenues.
Despite this, the company has continued to grow its dividend, although only by 1% for the past couple of years. Obviously, Rotork's management is keen not to lose its status as a dividend champion.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.