2 surprising dividend-growth stocks I’d buy today

These two shares could gradually becoming stunning income plays.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While a stock’s dividend yield is of great importance to income investors, its dividend growth potential is also highly significant. Certainly, in the short run, a stock with a high yield will offer a greater income return than a company with a lower yield and a fast-growing dividend. However, in the long run the latter may generate a higher total return as investor sentiment warms to its improving income prospects. With that in mind, these two companies could be worth buying right now.

Continued growth

Reporting on Tuesday was housebuilder Redrow (LSE: RDW). Its full-year results showed a rise in its dividend payout of 70%. It was able to increase its shareholder payout at such a rapid rate because of its improving financial performance. Its revenue moved 20% higher, while its pre-tax profit was a record £315m, which is 26% higher than the previous year’s £250m.

The company’s growth strategy has continued to deliver impressive results. Legal completions were up 15%, while the number of outlets and employees rose by 3% and 12%, respectively. Further growth in all of these areas is expected over the medium term, with the company benefitting from rising demand for new homes and a lack of supply. A loose monetary policy is also keeping mortgage availability high, and this situation looks set to continue into the next financial year.

With a dividend yield of 2.7%, Redrow is not necessarily a strong income stock in the short run. Inflation is only 10 basis points lower than its income return, for example. However, with earnings due to rise by 8% next year and dividends being covered over four times by profit, the scope for a higher level of shareholder payout in future is high. This could make the company a stunning income play for the long term.

Improving business

Also offering a surprisingly impressive income outlook for the long term is gold miner Randgold Resources (LSE: RRS). It currently yields just 1.9%, but has the potential to deliver rapid dividend growth in future. One reason for this is its strong balance sheet, with the company having cash of $573m and no debt. This should provide it with sufficient capital for its exploration and development programme over the medium term and means it may be able to pay out a relatively high proportion of profit as a dividend each year.

At the present time, Randgold Resources has a payout ratio of 61%. This is expected to rise to around 70% next year and it would not be a major surprise if it headed higher in future years. Alongside this, the company is forecast to increase its bottom line by over 20% per annum during the next two years as a higher gold price, increased production and a more efficient business model combine to generate higher profitability. As such, the company’s dividend prospects appear to be impressive and it could become a must-have income share in the long run.

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.

Peter Stephens owns shares in Randgold Resources and Redrow. The Motley Fool UK has recommended Redrow. 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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »