The dividend growth prospects of Diageo (LSE: DGE) continue to be relatively impressive. The FTSE 100 beverages company appears to have a strong position in a number of emerging markets, while its exposure to the developed world provides a degree of stability versus some of its index peers.
Of course, it’s not the only dividend growth stock that could be worth buying. A relatively small and risky stock that reported on Wednesday may offer high total return potential over the long run.
Resilient performance
The company in question is Epwin Group (LSE: EPWN). The manufacturer of low-maintenance building products delivered a robust performance in its half-year trading update despite challenging trading conditions. Revenue during the period was better than expected, falling from £149.9m in the first half of the previous year to £142.4m. It was hit by adverse weather conditions, as well as the loss of its two largest customers in the second half of 2017.
Looking ahead, Epwin is expected to deliver adjusted pre-tax profit for the current year in line with expectations. It anticipates a seasonally busier second half of the year, although market conditions are due to remain lacklustre in the near term.
The company’s dividend yield currently stands at 6.8%. Its dividend payments are expected to be covered twice by profit in the current year, which suggests they’re sustainable at their current level. Since the stock trades on a price-to-earnings growth (PEG) ratio of 0.6, it appears to offer a wide margin of safety. That could mean its total return is high over the medium term.
Growth potential
The dividend potential of Diageo remains highly appealing. The stock may have a dividend yield of just 2.5% at the present time, which is 1.3% lower than the FTSE 100’s dividend yield. However, there seems to be significant scope for rapid growth over the next few years.
The main reason is the company’s exposure to fast-growing markets. For example, it has a strong foothold in China, where the size of the middle-class is expected to grow significantly in future years. Higher disposable incomes and an increasingly consumer-focused outlook for emerging economies could mean that the company is well-placed to deliver impressive earnings growth over the long run. And with it having exposure to relatively stable markets across the developed world, it seems to offer an appealing mix of growth potential and resilient financial prospects.
Diageo’s dividend could also be set to rise rapidly due to its dividend cover. Its shareholder payouts are currently covered 1.8 times by profit, which suggests that dividends could grow at a faster pace than profit without becoming unaffordable. As such, the stock seems to offer an encouraging income outlook, which could have a very positive impact on your retirement savings.
