Buying shares with a mix of high yields and fast-growing dividends could be a shrewd move. Inflation is moving higher and investors may seek companies which are capable of offering a real-terms rise in income over a sustained period. However, stocks offering such qualities may have seen their share prices rise in recent months as investor demand has picked up. Here are two shares though, which remain cheap despite offering upbeat dividend outlooks.
Changing business
Reporting on Friday was non-standard lender Provident Financial (LSE: PFG). Its trading update showed that it is making encouraging progress despite an uncertain outlook. It is focused on investing in its various divisions, which seems to be a sound strategy given the difficulties which may lie ahead for the consumer lending space. With inflation moving higher, competition within the sector may intensify. Therefore, a focus on digital capabilities and new operating models could allow Provident Financial to post improving financial performance versus its peers.
Provident Financial currently pays out 79% of profit as a dividend. This appears to be a sensible level of payout, since it provides the company’s investors with a generous income return of 4.4% at the present time. It also means there is sufficient capital to reinvest in improving the business for the long term.
Dividend growth is expected to be 12% next year, which is slightly behind the forecast growth in earnings of 14%. This shows that a double-digit rise in shareholder payouts could be sustainable over the medium term. With a price-to-earnings (P/E) ratio of 17.8, the company appears to offer a sensible valuation given its impressive growth outlook. Therefore, capital gain prospects could be high alongside its strong income return.
Growth potential
Also offering growth potential is motor finance and specialist lender S&U (LSE: SUS). It faces an uncertain outlook due to the challenges posed by rising inflation. However, its bottom line is expected to rise by 17% this year and by a further 15% next year despite the risks from a deteriorating UK economy. As such, now could be the right time to buy it.
Even though it offers robust growth potential S&U trades on a low valuation. It has a P/E ratio of just 9.9, which suggests a wide margin of safety is on offer. When its rating is combined with its growth potential, it equates to a price-to-earnings growth (PEG) ratio of only 0.6.
In terms of income potential, S&U’s dividend yield of 5.3% remains highly enticing. Dividends are covered 1.9 times by profit, which suggests they should be able to grow by at least as much as earnings over the medium term without compromising the company’s financial standing. Therefore, with a potent mix of income potential, value appeal and bright growth prospects, S&U seems to be a logical buy for the long run.
