We recently compiled a list of the U.K. Dividend Champions List: 2024 Rankings by Yield.In this article, we are going to take a look at where Diageo plc (NYSE:DEO) stands against the other U.K. dividend champions.
In recent years, investors have shown a preference for global stocks, particularly high-growth options like US technology companies, over UK equities. Over the past decade, the British index has achieved a 6% annual total return compared to 13% for the US broader market. Analysts suggest that this underperformance is partly due to weak earnings, domestic political instability, and the absence of a significant technology sector in the UK market. However, a notable factor is the sharp decline in valuations as investors have steered away from UK stocks. Goldman Sachs remarked that the challenge is not a lack of interest from foreign investors, who currently hold about two-thirds of the UK market capitalization, but rather the limited participation of domestic investors in UK equities.
That said, investing in UK stocks can still be a worthwhile choice. While the UK market lacks significant technology companies, its equities in sectors like finance, energy, and mining provide diversification opportunities that complement the tech-heavy and highly valued US markets. In addition, the UK’s index faces less risk from tariffs and trade restrictions. Goldman Sachs Research highlighted that UK equities could gain from various government measures, such as pension reforms aimed at boosting domestic investment in UK stocks and policies supporting homebuilding initiatives.
Lindsay Matcham, involved in futures sales trading at Goldman Sachs Global Banking & Markets, suggested that UK equities could appeal to investors seeking diversification. She noted that these stocks offer attractive valuations, strong dividend yields, and reduced concentration risk.
Russ Mould, investment director at AJ Bell, presented a rather interesting take on the UK market's limited exposure to technology stocks. He pointed out that this reduced exposure has made the UK stock market less volatile compared to the US, where technology stocks are a key driver of market fluctuations. Mould observed that, despite its criticisms, the UK market experienced a relatively stable summer compared to the US, attributing this to differences in valuation and the relative expectations of the two markets.
The lower volatility in the UK market presents compelling investment opportunities, particularly given its attractive dividend yields. The FTSE 100 offers a yield of 3.68%, while the FTSE 250, representing medium-sized UK firms, provides slightly lower but still appealing income prospects. This setup allows investors to explore higher-growth sectors, such as smaller companies while benefiting from rising dividends. According to BlackRock, UK dividends are currently growing at a rate of 2-3%, aligning with long-term inflation. Stocks that consistently grow their dividends often have stable cash flows, enabling them to increase payouts over time.
Janus Henderson’s 2023 annual dividend report highlighted this upward trend, revealing that UK dividends reached approximately $86 billion in 2023, a significant rise from the $63.1 billion distributed in 2020. Given this, we will take a look at some of the best FTSE dividend stocks.
Our Methodology:
For this list, we reviewed the UK CCC Dividend list, which highlights UK companies with the longest histories of dividend growth. This list is based on the structure of David Fish’s US Dividend Champions spreadsheet and serves as a useful tool to help identify and screen dividend growth stocks in the UK. From this list, we chose 10 stocks with the highest dividend yields as of December 29 and arranged them in order from lowest to highest yield. We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 900 as of Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
Is Diageo plc (DEO) Among Warren Buffett’s New Stock Picks?
A close-up of bottles of whisky and other alcoholic beverages from a winery.
A British multinational alcoholic beverage company, Diageo plc (NYSE:DEO) ranks fourth on our list of the best FTSE dividend stocks. The stock has dropped by nearly 13% over the past year, largely due to a challenging macroeconomic environment. Despite this, analysts remain optimistic about the company's growth prospects. Diageo holds leading products in categories like scotch, gin, and vodka. Its large scale allows for substantial marketing investments, ensuring its brands remain prominent and difficult for competitors to displace. In addition, the company's size provides a strategic advantage, enabling it to acquire smaller competitors and increase their value before they become significant threats.
Diageo plc (NYSE:DEO) reported positive FY24 earnings that were reassuring for investors. The company generated $20.3 billion in revenue, which represented a slight decrease of 1.4% compared to the previous year. The report also highlighted that Diageo either grew or maintained its market share in over 75% of its net sales across measured markets, including the US. Aristotle Capital Management, LLC made the following comment about DEO in its Q3 2024 investor letter:
“Headquartered in London, England, Diageo plc (NYSE:DEO) is a global leader in the alcoholic beverages industry. The company has a vast portfolio of over 200 well-recognized premium spirits (~80% of FY 2024 sales), beers (~15% and mostly Guinness) and other beverages (~5%) that are sold in nearly 180 countries. Led by its Johnnie Walker brand, Diageo is the world’s largest exporter of Scotch whiskey—its largest category at ~25% of sales—followed by other spirits such as tequila and vodka (~10% each). Diageo also owns a ~34% stake in the premium champagne and cognac maker Moët Hennessy (a subsidiary of LVMH Moët Hennessy Louis Vuitton).
Diageo plc (NYSE:DEO) has been gaining momentum due to its robust cash flow. In FY24, the company generated $4.1 billion in operating cash flow and $2.6 billion in free cash flow, reflecting year-over-year increases of $0.5 billion and $0.4 billion, respectively. With this strong cash position, Diageo returned $1 billion to shareholders during the fiscal year and raised its annual dividend by 5%, bringing it to $1.0348 per share. The stock's dividend yield comes in at 3.26%, as of December 29.
Of the 900 hedge funds tracked by Insider Monkey at the end of Q3 2024, 26 funds held stakes in Diageo plc (NYSE:DEO), compared with 31 in the previous quarter. These stakes are worth nearly $703 million in total.
Overall DEO ranks 4th on our list of the U.K. dividend champions for 2024. While we acknowledge the potential of DEO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DEO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
