Dividend shares may have been popular in recent years, but thanks to rising inflation they could become even more in-demand in future. Investors are already finding it more challenging to generate a real-terms return with inflation at 2.3%. Since it is due to rise to 3% or more in 2017/18, it could become even more difficult to do so. With that in mind, there are two dividend shares which could be worth a closer look.
Improving performance
Reporting on Wednesday was income-focused real estate investment trust (REIT), Redefine International (LSE: RDI). Its earnings per share for the first half of the year were in line with guidance on an underlying basis. It was able to deliver such a result despite challenging economic circumstances, while also seeking to improve its business model. A number of transactions have strengthened its portfolio and it looks set to now offer an increasingly sustainable growth profile in the long run.
The company’s weighted average cost of debt was reduced to 3.3% from 3.4% last year. This helped to improve interest cover to 3.1 times from 2.7 times last year. Disposals of £95m helped to push cash resources up to £100.3m from £57.3m last year. This should provide the business with greater financial flexibility and allow it to conduct acquisitions in future, should the opportunities arise.
In terms of its income appeal, Redefine International currently yields around 8.4%. This makes it one of the highest-yielding shares in the FTSE 350. While dividends are not currently covered by profit, since the company has a large cash balance and growth potential from rising rents and occupancy rates, the outlook for modest dividend rises appears favourable. And with the company trading on a price-to-earnings (P/E) ratio of 11.7, it seems to offer excellent value for money, too.
Dividend growth potential
While Redefine International may offer a high yield and limited dividend growth potential, electronic products specialist Acal (LSE: ACL) appears to offer quite the opposite. In other words, while its yield may be somewhat average at 3.4%, it is expected to increase shareholder payouts by over 13% during the next two years. This means that it could be yielding as much as 3.9% by 2019.
As well as its forecast rise in dividends over the next two years, Acal has the scope to increase shareholder payouts beyond 2019 due to its high coverage ratio. For example, in the current year its dividend payouts are expected to be covered around 2.3 times by profit. This indicates that dividends could rise at a faster pace than profit without hurting the company’s financial strength. And since profit growth is expected to be 13% this year and 10% next year, dividend growth could easily end up being in the double-digits over the medium term.
With Acal trading on a price-to-earnings growth (PEG) ratio of 1.1, it seems to offer high growth prospects as well as a rising income return. Therefore, with inflation moving higher, now could be the perfect time to buy it.
