Investing in companies with the ability to deliver rising dividends over many years can be a powerful way to build wealth. Share price gains often follow dividend growth, creating impressive total returns.
What’s more difficult is to find companies with high yields that still have growth potential. In today’s article I’m going to take a look at two very different dividend growth stocks, each of which offers a dividend yield of about 5%.
Profitable pints
Pub group Greene King (LSE: GNK) appears to be making a decent job of running a fairly traditional business. Sales rose by 6.9% to £2,073m last year, while the group’s underlying operating profit climbed 4.9% to £392.2m.
Adjusted earnings per share were 1.3% higher at 69.9p, while the dividend was lifted 3.6% to 32.05p per share for a yield of 4.7%. Return on capital employed, a useful measure of profit for a business with lots of fixed assets, was unchanged at 9.4%. That’s respectable, if not spectacular.
Greene King shares have traded unchanged since the figures were released this morning, but there was some bad news. The group’s operating margin fell by 0.3% to 18.6%, due to cost pressures and the brand conversion costs resulting from the acquisition of Spirit pubs.
The firm was also forced to book an impairment charge of £58.6m against the book value of its pubs, due to “changes in the local trading environment”. A further £34.9m of impairment was recorded against sites that were closed or sold last year. These suggest to me that market conditions remain tough for pubs.
However, Greene King’s underlying business appears to be trading well and delivering fairly stable profits. For investors seeking income, I think that the forecast P/E of 9.7 and prospective yield of 4.8% could be an attractive long-term entry point.
A dividend flyer
Air Partner (LSE: AIR) may not be a name you’re familiar with. It’s a specialist aviation services company which provides charter services to governments, corporate customers and high net worth individuals. The group also includes an aircraft re-marketing business and consultancy services.
The firm is listed in the FTSE Fledgling index and currently has a market cap of just £61m. But it’s not a fly-by-night newcomer as it was founded in 1970 and has been public since 1989.
Recent performance has been strong. Underlying pre-tax profit rose by 17% to £5.1m last year, while underlying earnings rose by 10% to 6.5p per share. Shareholders enjoyed a 7.2% dividend hike last year, giving a total payout of 5.2p per share. That’s equivalent to a 4.6% yield at the current share price of 114p.
Air Partner has made several acquisitions over the last few years. These are helping to broaden the range of related services it offers and may deliver more stable profit growth. Although the company’s profits are likely to slump during recessions, its long history suggests to me that this business has staying power.
Analysts covering the stock expect underlying earnings to rise by 20% to 7.8p per share this year, putting the stock on a forecast P/E of 15 with a prospective yield of 4.7%. I believe this business could be a long-term growth story, and is worth a closer look.
