With inflation rising to 2.3% in February, dividend growth could become a more important part of investing. Previously, a high yield was sufficient for a stock to be seen as worthy of purchase by income investors. However, many higher-yielding shares may not be able to keep pace with inflation when it comes to dividend growth. Therefore, these two stocks could become more popular due to their scope to raise shareholder payouts at a rapid rate.
Provider of IT infrastructure products and services Softcat (LSE: SCT) reported impressive interim results on Wednesday. They showed that the company is making strong progress with its strategy. Revenue increased by 28.9% to £378.5m, while operating profit moved 36.3% higher. This allowed the company to increase dividends by 39.3% so that they now stand at 8.5p per share. While this puts Softcat on a yield of just 2.4%, its dividend growth potential is exceptionally high.
Part of the reason for this is a forecast rise in earnings of 9% in the next financial year. This puts Softcat on a price-to-earnings growth (PEG) ratio of 1.8, which indicates that its share price could move higher. Furthermore, the company’s dividends are currently covered 2.2 times by profit. This indicates they could increase at a faster pace than earnings over the medium term without putting the company’s finances under pressure.
Clearly, the outlook for the UK economy is uncertain thanks to Brexit. While in the long run leaving the EU could prove to be a good move for the economy, in the short run it could mean downgrades to earnings outlooks for UK-based companies such as Softcat. As such, its shares could come under a degree of pressure. But with a low valuation and strong dividend growth potential, it could still prove to be a shrewd long-term buy.
Established dividend stock
While Softcat’s dividend yield is relatively low at the present time, global aviation support company BBA Aviation (LSE: BBA) has a yield of 3.5%. This puts the yield almost in line with the FTSE 100 and means that even if inflation moves higher, investors in the stock should be able to generate an income return which is positive in real terms.
Furthermore, BBA Aviation has scope to increase dividends at a brisk pace. It is expected to record a rise in earnings of 21% this year, followed by further growth of 9% next year. Clearly, this is dependent on the performance of the global economy. However, with the company’s shares trading on a PEG ratio of 1.6, they appear to include a wide margin of safety in case there are downgrades to guidance.
With BBA Aviation’s dividend being covered 1.8 times by profit, its shareholder payouts could increase at an even faster rate than its bottom line over the medium term. Therefore, buying its shares right now could enable investors to generate relatively high income returns in future years.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended BBA Aviation. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.