Finding shares with high yields is not a particularly challenging task. However, unearthing companies which offer the potential for rising dividends can be more difficult. That’s at least partly because they are dependent upon a range of factors, including earnings growth, financial strength and operating conditions. However, here are two shares which seem to offer scope for dividend growth as well as capital gain potential in the long run.
Interim update
Reporting on Wednesday was software and IT services business Sanderson Group (LSE: SND). It delivered a rise in revenue of over 10% versus the same period of last year, with pre-contracted recurring revenues up to £5.4m from £5.2m in the first half of last year. They now account for around half of total revenue and show that the focus on fostering long-term customer relationships is bearing fruit.
Operating profit was 5% higher, while net cash at the period end was up to £4.5m from £3.4m at the same point last year. The company raised dividends by 10%. While this was ahead of profit growth, Sanderson Group still has a dividend coverage ratio of 2.1. This suggests that dividends could increase at a faster pace than earnings without putting the company’s financial position under pressure over the medium term.
Looking ahead to next year, Sanderson Group is expected to record a rise in its bottom line of 6%. This could help to boost dividends yet further, and they are expected to increase by over 10% next year. While this puts the company on a modest forward dividend yield of 3.5%, more dividend growth could make Sanderson a relatively attractive income share for the long run.
Growth potential
Also offering upbeat growth potential is escrow and assurance service provider NCC (LSE: NCC). Its dividend yield of 2.8% is also below that of the FTSE 100, but the company is expected to deliver improving earnings growth over the next two years. This could act as a positive catalyst on shareholder payouts.
For example, NCC is forecast to record a rise in earnings of 16% per annum over the next two years. Given that it has a dividend coverage ratio of 1.6, this could lead to a fast-paced dividend growth outlook. In fact, shareholder payouts are expected to rise at an annualised rate of 8.6% over the course of the next two years. This rate of growth is likely to be above and beyond the rate of inflation, which could make NCC a more popular income share.
As well as its income prospects, NCC also offers clear upside potential. It has a price-to-earnings (P/E) ratio of 23, which, when combined with its growth outlook, translates into a price-to-earnings growth (PEG) ratio of just 1.4. Given the company’s track record of growth and the sound business model which it has adopted, now could be the right time to buy it for the long term.
