While stocks with high yields offer strong income returns in the short run, over the long term they have the potential to deliver impressive capital growth. A high yield can indicate that a stock is undervalued, which could equate to a margin of safety. And if a generous dividend growth rate is expected over the medium term, it could suggest that the stock in question offers improving financial prospects.
With that in mind, here are two FTSE 100 dividend shares that could deliver impressive returns in the long run. They may be able to improve your retirement savings prospects due to their strong income credentials.
Improving performance
Reporting on Wednesday was water and waste water services company Severn Trent (LSE: SVT). Its recent performance has been impressive, and it made an encouraging start to the financial year. It expects to report financial performance that is in line with previous guidance, and is working towards AMP7. This is a new Asset Management Period which will last for five years.
Severn Trent is on track with the £100m reinvestment that was announced in May as it seeks to improve its customer performance. It has also restructured parts of its business in preparation for AMP7, and states in its update that it is supportive of the regulator’s approach.
In terms of its income prospects, the stock has a dividend yield of 5% at the present time. Next year it is due to report a rise in dividends of 7.3%, which puts it on a forward dividend yield of 5.3%. With the company having a relatively stable business model and scope for further dividend growth, due in part to dividend coverage of 1.4, its income future appears to be bright.
Uncertain outlook
Also offering a relatively high dividend yield right now is retailer Kingfisher (LSE: KGF). The company has experienced mixed performance in recent quarters, with weak consumer confidence hurting its sales growth.
However, the company is focused on improving its efficiency, while also seeking to improve on its customer offering. As a result, it is expected to deliver impressive earnings growth over the next two years. In the current year its bottom line is forecast to rise by 14%, while further growth of 19% is expected next year. With it trading on a price-to-earnings growth (PEG) ratio of 0.6, it appears to offer a wide margin of safety.
Kingfisher’s dividend yield of 3.5% may not be one of the highest in the FTSE 100. However, with dividends being covered 2.4 times by profit and the stock expected to deliver high profit growth over the medium term, its income potential seems to be high.
Certainly, there could be uncertainty ahead if consumer confidence in the UK remains weak. But with a strong competitive position, an improving balance sheet and greater efficiency ahead, its shares could become an enticing income prospect.
