Two top dividend stocks with strong growth potential

These two shares could become increasingly popular due to their income potential.

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While buying high-yield shares is one way of combating the effects of higher inflation, buying shares with high dividend growth rates could be another. Certainly, in the short run their income return may be lower than for higher-yielding peers. However, in the long run their total returns could be higher as investors seek means of negating the effects of inflation on their income over a sustained period. With that in mind, these two shares could be worth a closer look.

Growth potential

Reporting on Wednesday was international transport company National Express (LSE: NEX). It was able to continue the strong momentum experienced in 2016 in the first part of 2017, with revenue rising by 5.4% on a constant currency basis. It benefitted from organic growth and a number of bolt-on acquisitions which were made recently.

National Express has been able to improve its operational performance and deploy technology to a greater extent in order to boost its profitability. North America has had a strong start to the year, with revenue up 5.8% and the company enjoying a strong bid season. Its contract retention rate of 96% indicates that its service offering is relatively high. While challenging conditions in the UK Bus sector equated to a fall in revenue in some parts of the business, this was offset to at least some extent by strong performance in the German Rail segment and in UK Coach.

With National Express yielding 3.7%, its income return is only 0.1% lower than that of the FTSE 100. However, since its dividend is covered 2.2 times by profit, there seems to be significant scope for a rapidly-rising dividend over the medium term. With profit growth of 7%-8% expected on an annualised basis over the next two years, now could be the right time to buy National Express.

Turnaround prospects

Another stock with a bright future is Dart Group (LSE: DTG). It could also be worth buying at the present time. The company has experienced difficult trading conditions in recent years, with customer demand coming under pressure. This has caused the company’s bottom line to fall in the most recent financial year at a double-digit rate, with a further 25% decline in profit expected in the current year.

However, Dart Group’s fortunes are expected to improve dramatically next year. It is forecast to post a rise in earnings of 15%, with its price-to-earnings growth (PEG) ratio of 0.9 indicating that its prospects have not yet been priced-in by the market. That’s despite a 30% rise in its share price since the start of the year.

While Dart Group may only yield 1% at the present time, its dividends are covered 6.2 times by profit. Alongside its strong earnings growth potential, this suggests that a sustained rise in shareholder payouts could be ahead. This has the potential to transform the company’s share price performance and lead to a high total return in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Dart Group and National Express Group. The Motley Fool UK has no position in any of the shares mentioned. 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.

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