As dividends have been shown to make up the majority of investment returns, their appeal is understandably high. Investors seeking a high income return in retirement are also likely to be fans of dividend stocks, while increasing dividends also indicate that a company is financially healthy. Furthermore, a high yield also shows that a stock may offer good value for money and capital gain potential to go alongside its high income return.
A growing dividend
One stock that offers brisk dividend growth over the next couple of years is Royal Mail (LSE: RMG). Its shareholder payouts are expected to rise by 4.2% per annum over the next two years. This means that even if inflation increases to the near-3% level the Bank of England predicts next year, the company’s investors will still see a real terms rise in their incomes.
Clearly, Royal Mail is enduring a challenging period at the present time. Its earnings are expected to flatline this year and then increase by just 3% next year. However, its European operations continue to offer long-term growth potential, while the increasing popularity of internet shopping could mean that its overall performance is relatively impressive.
With a dividend coverage ratio of 1.8, there’s scope for Royal Mail to raise dividends at a faster pace than earnings growth over the coming years. This would still leave the business with sufficient capital for reinvestment in future growth. And with it offering a relatively defensive business model, it’s likely to prove to be a reliable dividend payer in future years. As such, now could prove to be a good time to buy it.
A stunning yield
HSBC (LSE: HSBA) has one of the highest yields in the FTSE 100. It currently stands at 5.9%, which is around 2.1% higher than the wider index. Such a high yield means that capital growth requirements are relatively low in order for the bank’s investors to achieve a double-digit total return. On this front, HSBC offers significant potential however, since it has a low rating and is in the middle of a transitional period that could positively catalyse its earnings.
For example, the Asia-focused bank has a price-to-earnings (P/E) ratio of 14.1 and is forecast to increase its earnings by 5% in the next financial year. This is at least partly due to the cost savings the bank is implementing. They should lead to a more efficient and resilient business in the medium term, which is better able to make growing dividend payments a priority.
HSBC’s dividend accounts for 83% of its profit. While there may be somewhat limited scope for this figure to rise, the potential for growth within the rapidly growing Asian economy is high. This means that dividends could rise in line with profit over the long run, thereby making HSBC a high yielding and highly enticing buy for those investors with a long view.
