2 much-loved dividend growth stocks to buy for 2017

These two share prices could keep rising after their exceptional capital gains.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the last five years, the FTSE 100 has risen by 32%. While that may sound like a strong return, it equates to an annualised return of 5.7%. When dividends of around 3.5% are added to this figure, it is roughly in line with the long-term average for the index. During the same time period though, a number of shares have generated significantly higher returns. Here are two which have done so, and which could still be worth buying this year.

Growth potential

Reporting on Thursday was packaging and paper company Mondi (LSE: MNDI). Its underlying operating profit for the first quarter was 6% lower than in the same period of the prior year. Strong sales volumes were more than offset by a substantially lower forestry fair value gain, as well inflationary cost pressures and lower average selling prices. These challenges are due to continue in the near term, although the company is making progress in passing on higher input costs to customers and continues to experience high levels of demand.

In the last five years the Mondi share price has risen by 270%. Looking ahead, further share price growth could be on the cards. One potential catalyst is its scope for higher dividends. Currently, it pays out just 41% of profit as a dividend. This figure could be increased dramatically, while leaving the business with sufficient capital through which to invest for future growth.

In fact, in the current year dividends are due to rise by around 11%, followed by further growth of 5% next year. This may put the company’s shares on a relatively low forward yield of 2.8%, but additional growth could lead to increased appeal from an income perspective. This could help to push Mondi’s share price higher over future years.

Low valuation

Also making gains in the last five years have been shares in fellow packaging company, Macfarlane Group (LSE: MACF). Its shares are up 240% during the period, and yet they continue to trade on a relatively low valuation given the company’s growth potential.

For example, over the next two years the business is expected to report a rise in its earnings of 21% and 8% in 2017 and 2018 respectively. This puts its shares on a price-to-earnings growth (PEG) ratio of just 1.3, which suggests that they remain undervalued.

In terms of its dividend prospects, Macfarlane pays out around 38% of its profit as a dividend. This means that its shareholder payouts could increase at a faster pace than profit over the medium term without putting its growth strategy under pressure. And since its dividend yield currently stands at 3.3%, it offers an inflation-beating yield at the present time.

Certainly, there may be higher-yielding shares on offer right now. But with a mix of growth, value and income potential, Macfarlane seems to be a sound buy for the long term.

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 has no position in any shares mentioned. 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.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »