2 dividend growth stocks you should consider

These two stocks offer an attractive blend of both income and growth.

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Over the past five years, shares in Cathedral City producer Dairy Crest (LSE: DCG) have risen by more than 70% as the company’s management has simplified the business and improved profitability. For example, over the past five years while revenue has dived, the company has moved from a loss of £10.7m to an expected profit of £66.5m for the financial year ending 31 March 2018. Over the period, revenue has fallen from around £1.4bn to £460m.

And according to an update from the firm today ahead of its AGM, it looks as if Dairy Crest is on track to meet City expectations for growth this year. Indeed, according to today’s update, the company notes that combined sales of its four key brands — Cathedral City, Clover, Frylight and Country Life — are 7% ahead of the same period last year. The leading Cathedral City brand has put in the strongest performance with volumes up 15% year-on-year.

That said, while volumes are growing, like a number of other UK businesses, Dairy Crest is struggling with inflationary pressures. Today’s update notes that cream prices have increased substantially during the first quarter putting pressure on margins. To mitigate the margin squeeze, management has reduced promotional activity, which is “adversely impacting volumes but mitigates some of the margin pressure.”

Even though Dairy Crest is facing some near-term pressure from high ingredients costs, from a long-term perspective, it remains attractive. 

Defensive play 

As a consumer goods business, Dairy Crest is a defensive investment and no matter what the economic environment, demand for its products should remain robust. With this being the case the company’s valuation of 16.7 times forward earnings does not seem overly demanding and a dividend yield of 3.8%, which is covered 1.4 times by earnings per share, looks attractive. According to City forecasts, earnings per share are expected to expand at a rate of between 3% and 5% per annum for the next few years.

Rapid recovery 

Shares in Dairy Crest offer an attractive blend of income and growth and so do shares in RSA Insurance (LSE: RSA). After a restructuring programme that began in 2014, over the past two years, its recovery has quickly gained traction and over the previous 12 months, shares in the group have returned more than 30% excluding dividends.

It now looks as if the group’s recovery is nearly complete. City analysts have pencilled in earnings per share growth of 10% for this year and 19% for 2018, taking earnings to 52p per share off the back of a pre-tax profit of £705m. Based on these figures, shares in the company are trading at a 2018 P/E of 11.7, which is highly attractive considering the projected earnings growth. Analysts have also pencilled in a dividend yield of 4.7% for 2018 with a dividend cover of 1.8. So, even though RSA has had some problems in the past, it looks as if these issues are now well and truly behind the group and it now looks to be a quite attractive investment opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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