Three UK stocks for long-term quality growth

Professional investor Blake Hutchins of the Troy Income & Growth Trust highlights three high-quality companies that should grow their dividends.

Diageo bottling plant
Diageo is a leader in the global spirits market
(Image credit: © Mike Wilkinson/Bloomberg via Getty Images)

At Troy Income & Growth Trust, we seek to invest in high-quality, resilient companies that can grow their dividends. This should allow the trust to produce a balanced total return made up of a growing income stream along with capital growth. The core focus is on UK companies. At least 80% of the portfolio is invested in companies listed in the UK, with select investments in high-quality international businesses. We seek to be the high-quality, conservatively-managed, dividend growth trust in the AIC UK Equity Income sector.

As part of our endeavour to shield equity investors from excess market volatility, the trust employs a discount control mechanism (DCM), actively issuing and buying shares to ensure that it trades within a few percentage points of its underlying net asset value at all times. The DCM also means investors enjoy significantly improved liquidity when buying and selling the trust’s shares.

Premium spirits take the lead

We seek out companies and sectors that are able to sustain high returns on capital and can grow cash flow per share over a long period. We believe that consistent cash generation reinvested at high returns on capital is the only truly sustainable source of long-term enterprise value creation and dividend growth. Companies with these attributes tend to have clear competitive advantages supported by valuable brands, powerful network effects, or high switching costs.

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Diageo (LSE: DGE) is one of a number of consumer staples companies held in the portfolio. Diageo is a leader in the attractive global spirits market and is the owner of valuable brands including Johnnie Walker, Tanqueray and Baileys. Demand for premium spirits is growing as consumers are trading up from other drinks and Diageo has the brands and distribution to continue to capitalise on this trend. As a highly defensive business with strong pricing power, Diageo is not only a good stock for the current environment but also has attractive long-term growth prospects.

Bringing a lot to the table

Compass Group (LSE: CPG) is one of the world’s leading outsourced catering companies. In certain industries, it is said that scale begets scale. This is undoubtedly true in contract catering where leveraging buying power on food and supplies is key in generating good economics. Companies, entertainment venues, schools and hospitals are increasingly outsourcing catering, particularly given the current inflationary environment. Compass is the largest player in the industry and is still gaining market share. The pandemic presented operational challenges for the industry, but Compass looks to be emerging stronger than ever and is well placed for resilient dividend growth.

Data as currency

We have long been drawn to software and data companies as they require little incremental capital to grow. One of the portfolio’s largest holdings is RELX (LSE: REL) – an owner of unique databases and digital workflow solutions that serve professionals in various sectors including legal, insurance, science and academia. RELX’s data sets and software solutions are deeply embedded into customers’ workflows, which results in high switching costs and therefore highly recurring cash flows and dividends. As industries continue to digitise, RELX is well placed to capture further growth in the years ahead.


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Blake Hutchins

Blake Hutchins is manager of the Trojan Income Fund and co-manager of the Troy Income & Growth Trust.