Tesco (LSE: TSCO) is not known as a strong income share. After all, it yielded just 1.4% in the most recent financial year. That’s 2.6% behind the income return on offer from the FTSE 100, and is unlikely to be of much use to a retiree who is concerned about the rising State Pension age.
However, the retailer is due to deliver rapid dividend growth over the next few years, and this could make it an appealing income share over the medium term. Could it therefore be worth buying alongside a company which reported positive news on Tuesday, and that is also expected to deliver a rapidly-rising dividend?
Improving performance
The company in question is co-work and workspace specialist IWG (LSE: IWG). It released a third quarter trading update which showed that its open centre revenue growth was 13.2%, while mature revenue growth was 3.9%. Its mature occupancy improved by 70 basis points to 74.3%, while it has seen improved franchising momentum through 115 committed locations to date, alongside a strong pipeline.
The company’s performance in markets such as the US, EMEA, and Asia Pacific has been strong. While the UK has been relatively disappointing, the company remains optimistic about its long-term growth potential.
Looking ahead, IWG is forecast to post a rise in earnings of 25% in the next financial year. This could help to boost its dividend growth rate, with its shareholder payout set to increase by around 10% per annum in the next two financial years. This puts the stock on a forward yield of 2.7%. With dividends due to be covered 2.2 times by profit next year, further increases in shareholder payouts could be ahead.
Revised strategy
Tesco also has strong dividend growth prospects. After paying 3p per share in dividends in the last financial year, that figure is due to increase to 5.4p in the current year, followed by 7.5p next year. This puts the company on a forward dividend yield of 3.5%, which is only 0.5% lower than the FTSE 100’s dividend yield.
With dividends due to be covered 2.2 times by profit, there seems to be further scope for increases in shareholder payouts over the long run. The retailer has put in place what appears to be a sound growth strategy that has focused on improving the performance of its core operations through reducing costs, improving customer service, and offering better-quality products.
The company’s strategy appears to be working well, with earnings due to rise by 19% this year, and by a further 20% next year. That’s despite risks in the wider UK retail sector, with consumer confidence expected to remain weak in the near term as the Brexit process continues.
However, with a rising dividend, a price-to-earnings growth (PEG) ratio of 0.8, and what appears to be a sound strategy, the Tesco share price could offer an improving income return that helps retirees to overcome what is a modest State Pension.
