Two dividend knockouts I’d buy instead of the FTSE 100

These two income shares could outperform the FTSE 100 (INDEXFTSE:UKX).

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The FTSE 100 has performed relatively well in the last year. It has risen 6.5% and when dividends are included, its total return is over 10%. Looking ahead, more growth could be on the cards for the index. However, with it trading close to an all-time high, some investors may be concerned about its valuation. With that in mind, here are two stocks trading on low valuations and which offer stunning dividend growth potential over the medium term.

Upbeat outlook

International building materials group CRH (LSE: CRH) announced details of an acquisition on Thursday. The company has reached an agreement to acquire Ash Grove Cement Company for a total consideration of $3.5bn. The deal will be financed through existing resources and is expected to close at the end of the calendar year. With Ash Grove Cement being a leading US cement manufacturer, it could prove to be a positive catalyst on the company’s future financial performance.

While CRH currently yields just 2.2%, its dividend is covered 2.5 times by profit. This suggests that shareholder payouts could grow at a rapid rate and make the company a strong income play in the long run.

In addition, CRH is forecast to increase its bottom line by 15% in the current year and by a further 12% next year. Although the company trades on a relatively high price-to-earnings (P/E) ratio of 17.9, when combined with its earnings growth forecasts it has a price-to-earnings growth (PEG) ratio of just 1.3. This suggests that it could offer high capital growth potential which may allow it to outperform the FTSE 100 in future years.

Uncertain outlook

Also offering upside potential is Kingfisher (LSE: KGF). The DIY retailer posted upbeat results on Wednesday which showed that its transformation plan is gathering pace. It is seeking to become a more customer-focused and efficient business as it seeks to overcome what could prove to be challenging trading conditions. That’s especially the case in the UK, with inflation levels moving higher and having the potential to squeeze consumer spending over the medium term.

Investors seem to have priced in a period of difficulty for the stock. It trades on a P/E ratio of 13.1, which suggests that it offers a wide margin of safety. Despite this, the company’s outlook is relatively positive in the near term. It is expected to record a rise in its bottom line of 13% next year, which puts it on a PEG ratio of just 1.

Regarding its dividend potential, Kingfisher arguably lacks the stability or consistency which more defensive income stocks could provide. However, with a dividend yield of 3.4% and a payout which is covered 2.2 times by profit, it has the potential to grow dividends at a rapid rate. Therefore, while it may have an uncertain future, it could prove to be a top notch income play for the long run.

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Peter Stephens does not own shares in any of the companies 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.

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