The Motley Fool

2 dividend stocks with 15% growth potential in 2017

Investors often believe they have to choose between income and growth. But the reality isn’t so clear cut.

The two companies I’m looking at today are dividend-paying FTSE 100 firms, but both of them have a strong track record of growth.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Shares of both firms have risen by at least 100% over the last five years, outperforming both the FTSE 100 (+25%) and the FTSE Small Cap index (+78%). Both companies have also delivered substantial dividend growth over the same period.

Recent trading suggests that further gains are possible. The latest broker forecasts predict both firms will deliver earnings per share growth of about 15% in 2017, along with inflation-busting dividend growth.

The Asian growth engine

Insurance group Prudential (LSE: PRU) has a 169-year history here in the UK, but it’s the firm’s Asian operations that are leading its growth, along with a thriving US operation.

During the first half of 2016, Prudential’s group operating profit rose by 6% to £2,059m, adjusted for exchange rate differences. Operating profit from Asia rose by 15% to £743m, highlighting the growing contribution being made by this region.

The opportunity for Prudential is that the insurance market is much less mature in Asia than it is in the West. Rapid growth is possible for companies with effective marketing and competitive products.

Prudential’s operations certainly appear to generate plenty of surplus cash. Net cash remittances from the group’s trading units rose by 5% to £1,118m during the first half of 2016. I estimate that this year’s forecast dividend of 41.6p per share — totalling around £1,073m — should be covered comfortably by full-year remittances.

Prudential currently trades on a 2016 P/E of 13.5, falling to a P/E of 11.6 for 2017. Although the stock’s dividend yield is only about 2.7%, it’s well covered by cash. The Pru’s dividend has grown by an average of 10% per year since 2010, and I believe Prudential could be a buy at current levels.

Will this cash machine ever stop growing?

If Reckitt Benckiser Group (LSE: RB) increases its 2016 dividend by 9.5% as expected, then the consumer goods group won’t have cut its dividend for at least 20 years.

Reckitt’s dividend payout has risen by 479% since 1997. The secret of this firm’s success lies in the very high returns it generates on invested capital. Reckitt’s return on capital employed and its operating margin have both averaged about 25% in recent years.

This helps the group generate high levels of free cash flow, which is used to fund the dividend and further growth. It also means that net debt is very low.

As you’d expect from such a high-quality business, Reckitt shares don’t come cheap. The group’s stock trades on a 2016 forecast P/E of 23, falling to a P/E of 20 for 2017. Dividend yield is 2.2%, rising to 2.5% for 2017.

Quality-focused investors such as Fundsmith’s Terry Smith believe paying a high price for businesses that generate high returns makes sense and leads to long-term out-performance. Mr Smith’s track record suggests he could be right. If you think so too, then Reckitt Benckiser could be an excellent addition to a long-term portfolio.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.