While dividends provide an income return, they also indicate the health of a company and its future prospects. A stock which pays out a rapidly rising dividend is likely to be in the midst of high profit growth, or else on course to achieve it. Therefore, dividends can act as a positive catalyst on share prices. With that in mind, here are two stocks which offer high yields as well as scope for even higher dividends over the medium term.
A turnaround play
Support services company G4S (LSE: GFS) could prove to be one of the best turnaround stocks in the UK index. Just a few years ago it was embroiled in a government scandal involving electronic tagging equipment. This saw the company’s profitability come under severe pressure and declining investor sentiment pushed its share price down by around a third.
However, with a refocused strategy G4S is now making a comeback. It’s expected to record a rise in earnings of 7% this year and 15% next year, which means that dividends can be increased by around 4.2% per annum during the same time period. While this rise in dividends may not sound so high, it’s worth bearing in mind that G4S is still in a recovery phase, so to be able to offer an above inflation rise in shareholder payouts indicates that its long-term future is very bright.
The company currently yields 4.4%, but this could move higher since dividends are due to be covered 1.8 times by profit in 2017. Certainly, G4S remains relatively risky due to uncertainty in the UK outsourcing sector. But for long-term income investors it has tremendous appeal.
A construction opportunity
Kier Group (LSE: KIE) currently yields 4.8%. This puts it towards the top end of yields within the FTSE 250 and with the company having raised shareholder payouts by almost 5% per annum during the last five years, it’s a relatively reliable income play.
Of course, Kier faces significant risks. Brexit is likely to weight on its near-term performance, since confidence in the housing market could fall if Brexit negotiations falter. That’s especially the case if inflation keeps rising and the Bank of England decides to increase interest rates in order to cool the wider economy. However, since Kier trades on a price-to-earnings (P/E) ratio of 12.7, it offers a wide margin of safety which prices in the risks it faces.
In the long run, Kier offers high dividend growth prospects. Demand for housing is likely to increase as the population rises and the level of housebuilding continues to fall short. Therefore, Kier offers high dividend growth potential from improved earnings, as well as the fact that it has a payout ratio of just 61%. This shows that dividends could rise faster than earnings in future years and leave Kier with sufficient capital with which to invest in its future growth prospects.
