Four high-quality stocks set for decades of dividend and earnings growth

Charles Luke, an investment manager for Murray Income Trust, highlights four favourite high-quality stocks.

Bundles of money hovering over white surface in bar graph formation showing variable growth under blue wave pattern
(Image credit: Getty Images)

In 1974, the Ford Cortina was the UK’s most popular car and Leeds United topped the First Division. It was also the year in which the directors of the Murray Income Trust decided to increase the full-year dividend from just under to just over half a penny.

This year Murray Income celebrated its 100th anniversary and its 50th consecutive annual dividend increase, paying a total dividend of 37.5p to its shareholders (representing a healthy compound annual growth rate throughout the period of 9.15%).

The longevity of Murray Income’s dividend record can be explained by three factors.

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  • The structure of investment trusts, with revenue reserves, has helped to smooth income
  • The strength of overseas currencies have helped with a dividend paid in sterling. 
  • But to my mind the overarching reason for the payout’s heroic performance has been the portfolio’s focus on high-quality businesses able to grow their earnings and hence their dividends over the long term, through good times and bad.

In light of the above I’ve chosen four high-quality companies with exposure to three enduring trends – digital transformation, the energy transition, and ageing populations – that can hopefully deliver similar levels of long-term earnings growth, long-term dividend growth and capital appreciation. 

1. Sage (LSE: SGE)

Sage (LSE: SGE), a company I last mentioned in this column in March 2012, is a leading supplier of accounting and business management software to smaller companies that have underinvested in digital tools. 

Sage has a competitive product portfolio, aided by the success of the acquisition of Intacct a number of years ago, to provide help. There is scope to grow geographically and through further product innovation, while margins should benefit from operating leverage. The firm’s products are typically embedded in their customers’ workflow and provide a large benefit for a relatively limited cost. 

2. Rotork (LSE: ROR)

The next company is Rotork (LSE: ROR), a leading manufacturer of actuators. The company has an attractive part to play in the energy transition helping to remove methane emissions in oil and gas wells while also enabling the development of hydrogen and carbon capture, utilisation and storage (CCUS). 

Rotork has strong quality characteristics with attractive margins, a high return on capital employed, robust brand resonance and a net cash balance sheet.

3. Oxford Instruments (LSE: OXIG)

Oxford Instruments (LSE: OXIG) is exposed to several structural growth markets as a leading provider of advanced instrumentation equipment used for scientific research, chemical analysis, semiconductor processing and diagnostic imaging.

It benefits from technological leadership, a strong brand and good commercial nous. The company should deliver attractive revenue growth with improving margins. The net cash balance sheet provides additional avenues for expansion.

4. Convatec (LSE: CTEC)

The final stock is Convatec (LSE: CTEC), which is in the midst of a turnaround under a management team we rate highly. Convatec has operations in the areas of infusion care, ostomy care, advanced wound care and continence care. These areas provide exposure to chronic care with recurring revenues and high customer dependency in growing markets driven by population ageing. Convatec has a clear plan to enhance revenue growth and greatly improve operating margins. The firm trades at an unjustifiably large discount to its nearest rival.

This article was first published in MoneyWeek's magazine and all information was correct at the time of writing. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Charles Luke is manager of the Murray Income Trust (LSE: MUT).