2 stocks with fantastic long-term dividend potential

At first glance income investors may take one look at the 2.54% yield shares of Howden Joinery (LSE: HWDN) offer and walk away but that would be a huge mistake.

Why? First off because the company’s true shareholder returns are more than double the headline 2.54% yielding dividend suggests. This is because the company supplements the annual dividend, which totalled £59m last year, with a share buyback programme that has returned £80m so far in fiscal year 2016 alone.

In addition, the kitchen maker has an amazing track record of growing earnings and dividends and with an ambitious expansion plan going well there’s plenty of room for future shareholder returns to continue growing.

This chart shows us that Howden has been growing sales per location at the same time as it added over 100 new depots in the UK. This is fuelling a huge rise in earnings and cash at hand, which has allowed an enviable rise in dividends while keeping shareholder payouts covered 2.75 times by earnings.

I reckon there’s plenty of potential for shareholder returns to continue growing rapidly as the company plans to expand to 800 depots in the next few years. This is a very achievable target and once it is met, management can decide to either invest retained earnings into growing the European business (which had just 24 locations as of Q3) or hugely increase dividends and share buybacks.

Either way investors are likely win in the long term. While Howden is a cyclical business, since it sells kitchens to builders, its net cash balance sheet and high margins due to a vertical supply chain are incredibly attractive. Add in shareholder returns totalling more than 5% a year, plus solid growth prospects, and I reckon income investors should give the company a closer look.

Long-term income potential worth paying for 

An ambitious expansion plan also has the potential to increase shareholder returns at discount retailer B&M (LSE: BME). At the end of Q3, the company had 533 stores in the UK and 73 in Germany with a medium term goal of 850 locations in the UK to be achieved by expanding outs of its core midlands and northern regions into the southeast of the country.

For now the company is using its growing earnings to fund expansion in both countries, which is why shares yield a miserly 1.68%. However, in the long term the rapid rollout of stores offers incredible potential for increased cash flow and eventually, for bumper shareholder returns.

This is down to new stores that pay for themselves within 15 months and are EBITDA-accretive within a year. Combined with sector-trouncing EBITDA margins of 9% B&M’s cash generation is very high with operating cash flow growing to £57.8m in H1 2017, even including expansionary capex.

Again, like Howden, once B&M hits its target of 850 UK stores, which at its current clip should be in five or six years, management may well decide to divert significantly increased cash flow to shareholder returns. Should this occur I reckon income investors will be very, very happy to own shares of this rapidly growing counter-cyclical business.

But is B&M the best income option out there?