Finding stocks with impressive dividend outlooks may be a crucial part of investing in 2017. After all, inflation is quickly rising and could hit 3% or more this year. Therefore, being able to generate a real-terms return may prove more challenging than at any time in the last decade. Here are two FTSE 350 stocks that could do just that, and which offer significant upside potential in the medium term.
A recovery play
The oil sector has been a difficult place to invest in recent years. Profitability has come under pressure due to lower prices for black gold, but following the decision by OPEC to cut production the industry may have turned a corner.
Certainly, the outlook for oil & gas support services company Amec Foster Wheeler (LSE: AMFW) has improved. Although it is expected to record a fall in profitability in 2017, its bottom line is due to rise for the first time in four years in 2018. This could help to improve investor sentiment in the stock, and also push its dividends higher. It may only be growth of 8% in earnings, but it means that Amec Foster Wheeler’s dividends are set to be covered 2.3 times by profit. This means they could rise rapidly and push its dividend yield of 4.9% higher over the medium term.
Alongside its income appeal, Amec Foster Wheeler also offers capital growth potential. Its shares trade on a price-to-earnings (P/E) ratio of just 8.6. Given its prospect of a rising bottom line, a higher rating may be justified over the medium term. This could make its total return exceed that of the wider index not just in 2017, but in future years, too.
Solid income stock
Manufacturer of component parts Essentra (LSE: ESNT) offers a relatively stable and consistent outlook for dividend investors. This could be well-suited to the outlook for the economy, since uncertainty is relatively high. As such, the company’s shares could become increasingly in-demand as investors seek relatively secure income streams.
Essentra currently yields 4% from a dividend which is covered around 1.5 times by profit. This indicates that there is adequate headroom to raise dividends at a similar pace to profit growth over the medium term. With earnings growth of 11% forecast for next year, Essentra’s shareholder payouts could grow at a rate which is well in excess of inflation.
Additionally, it trades at a slight discount to its historic average P/E ratio. Its rating is currently 18.1 versus an average over the last five years of 18.6. Therefore, there is some upward rerating potential, which when combined with its earnings growth prospects means Essentra could prove to be a top notch stock to hold for the long run. In fact, its price-to-earnings growth (PEG) ratio of 1.6 indicates that it offers growth potential at a reasonable price, thereby further enhancing its investment case.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Essentra. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.