2 dividend growth stocks I’m waiting to pounce on

With dividend payouts surging, I’m waiting to pounce on these income champions.

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Office service provider Restore (LSE: RST) may not be the cheapest stock around, but in my view, it looks to be one of the best dividend growth stocks on the market.

Over the past five years, it has gone from strength to strength as the demand for office services has risen. Today it reported revenue for 2017 up by 36% and profit before tax up by a similar amount thanks to increasing demand for its services overall, but also the significant office move by Bloomberg in London. This move helped grow revenue from relocation services by 25%. A large part of the growth also came from acquisitions. Organic revenue growth across the group was just 7%. Earnings per share increased 25% to 22.4p.

Boost from regulation 

As well as providing office services, Restore offers document management, a tedious but essential business for companies concerned about document security. 

This division is exposed to see a substantial benefit in 2018 from the introduction of the European Union’s GDPR data protection laws that give consumers more control over their data, giving them the right to ask firms to erase any records stored about them. Restore’s management believes that when this regulation comes into force in May, the company will “see more major projects for our records management operations…as more enterprises understand the need to ensure secure shredding of relevant documents, and also in scanning, driven by the need for enterprises to access their customer data more quickly.” 

And as the demand for Restore’s services grows, shareholders should be well rewarded. Today the company announced a 25% increase in its full-year dividend to 5p per share. 

This means a dividend yield of 1%, although it is not the current level of the yield that I’m interested in, it is the potential for further growth. Indeed, the 5p payout is covered five times by earnings per share, leaving plenty of room for growth. Over the past five years, the distribution has grown at a rate of 32% per annum, and if this continues, by 2023, the payout will have increased to 20p per share, for a yield of 4% based on the current stock price.

Cash-backed dividend 

Another company I like the look of is data business YouGov (LSE: YOU).  Demand for its surveying and data analytics offering has seen net profit increase at a rate of nearly 70% per annum on average over the past five years. City analysts are expecting a similar rate of growth in 2018 with earnings per share growth of 135% expected and an increase of 15% for 2019.

Unfortunately, the market has already priced the shares for perfection based on these projections. Right now the stock is trading at a forward P/E 32. However, once again it’s the dividend potential I’m interested in here. At the end of fiscal 2017, the company reported a net cash balance of £23m, enough to fund the current per share distribution of 2p for more than 10 years. The distribution itself is covered 4.6 times by earnings per share, leaving plenty of room for growth as revenues continue to expand. If the dividend continues to grow at its historical rate of 32% per annum, in five years, the shares will support a dividend yield of 2.3% based on the current stock price.

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.

Rupert Hargreaves owns no share 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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