Finding the best dividend stocks is likely to become more challenging during the course of 2017. Inflation is moving higher and it seems likely that investor demand for the top income stocks will drive their yields lower. As such, buying stocks with surprisingly impressive income prospects could be a worthwhile move at the present time. With that in mind, here are two shares which could boost your retirement prospects because of their dividend potential.
Reporting on Thursday was specialist components manufacturer and distributor Essentra (LSE: ESNT). Its trading update showed its performance since the start of the financial year has been in line with expectations. Like-for-like (LFL) revenue has modestly declined, as expected, although the trend in all three of the company’s divisions has been better than in the same period a year ago.
The actions taken in its Component Solutions and Filter Products divisions have put the two key segments on a more stable financial footing for the future. Now the company will focus on its Health & Personal Care Packaging sector, which has reported a significant decline in sales and profitability in recent months.
However, the difficulties faced by the business have not led to dividend cuts. Essentra currently yields around 3.9% from a dividend which is covered 1.3 times by profit. This shows its current level of payout is sustainable. And with profit due to grow by 15% next year, there is scope for a rise in shareholder payouts over the medium term. This could boost its share price performance and lead to capital gains – especially with Essentra trading on a price-to-earnings growth (PEG) ratio of just 1.5.
Cheap dividend potential
Also offering upbeat income prospects is UPVC windows manufacturer and distributor Eurocell (LSE: ECEL). It has performed relatively well in the last couple of years and has been able to grow earnings by over 50%. This growth trend is forecast to continue in the current year and next year, with earnings growth set to average around 9% per annum during the periods. This should allow dividend growth of almost 10% per annum over the course of 2017 and 2018.
Despite such a rapid growth in dividends, Eurocell looks set to offer a highly sustainable level of shareholder payouts. Its dividends are currently covered 2.4 times by profit, which indicates they could increase at a much faster pace than profit without hurting overall financial strength. And since its shares trade on a PEG ratio of just 1.4, there seems to be significant upside potential on offer, too.
Clearly, an uncertain economic outlook could mean there is scope for downgrades to its financial performance. However, with a generous yield of 3.5% and a relatively low valuation, the market may have already priced a degree of volatility into the company’s share price.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Essentra. 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.