A steadily rising dividend can really power a firm’s shares. We investors can win twice over with such situations by harvesting a growing income and enjoying capital gains from a rising share price.
By reinvesting dividends back into shares we can compound our invested funds, but reinvesting a growing dividend into a growing business is like compounding with a turbocharger — it can be an efficient way to build your wealth.
I like the look of these three firms because they smaller than the popular companies we see in the FTSE 100, borrowings seem under control in each case and decent cash inflow supports profits. A smaller business has more room to grow and that can lead to bigger dividend increases year-on-year.
All three firms today delivered positive results and upbeat outlook statements. RWS describes itself as the world’s leading provider of high-quality translation, intellectual property and language support services. Most desirable financial indicators moved firmly in the right direction with these full-year results and the directors pushed up the total dividend by 15%.
With its half-year results, light commercial vehicle hire company Northgate announced its new chief executive as it delivered results in line with previous expectations. The firm’s outlook is upbeat and the directors announced a 12% hike in the interim dividend.
Meanwhile, cloud hosting provider Iomart’s half-year results show double-digit increases in revenue and profit and City analysts following the firm expect the full-year dividend to come in 30% higher than last year’s payout.
High rates of dividend growth
There’s no doubt that these dividends are growing and I think a high rate of dividend growth can be more attractive than a high dividend yield with lower growth. Right now, at a share price of 287p, Iomart’s forward dividend yield runs around 1.6%, at 467p, Northgate’s is close to 3.8%, and at 313p, RWS’s sits at 2% or so.
There’s no sign of any stress for these dividends because the underlying businesses appear to be performing well. RWS, for example, says it’s continuing an unbroken series of dividend increases since the firm floated on the stock market during 2003. If these companies can go on to push dividends up like that in the years ahead, capital gains from their share prices could combine with ever-increasing dividend payouts to produce a very satisfactory total return for shareholders in the long run.
A focus on dividend growth can lead us to some of the stock market’s strongest businesses, I reckon. When considering the potential total investment returns from firms such as Iomart, Northgate and RWS, I think each one is capable of becoming one of 2017’s best income stocks.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.