Why this top dividend stock also has huge growth potential

The annual dividend yield from shares of specialty mental health care provider Caretech (LSE: CTEC) fell from 3.5% to 2.4% after a recent rights issue but this should only make income and growth investors alike even more interested in the company.

For one, this is because the rights issue was to expand the already growing business, not a cash call from a desperate management team. Second, the business is benefiting from several significant tailwinds, including steady 5% annual market growth, a shortage of care facilities and increased outsourcing by the cash-strapped NHS.

The company’s interim report released on Thursday makes clear the long term potential for sales, profit and dividend growth remain incredibly bright. The company’s occupancy rates in mature facilities remained high at 93% while overall occupancy rates stayed strong at 86%.

While the interim report contained no financial information high occupancy rates suggests the company is continuing a string of good results. These include full year results for 2016 that saw 19.9% year-on-year revenue growth and a 19.6% increase in earnings per share that supported an 11.6% bump in dividend payments.

The £39m raised from the rights issue together with £11.5m in additional funds supplied by its banks, gives the company the financial firepower to go out and grow its estate through acquisitions. Management is still setting about finding prime targets but with a property portfolio worth £300m at year-end £50m will go a long way to significantly increasing revenue.

With tailwinds at its back, a well covered dividend, plenty of cash for acquisitions and a low valuation of 10.4 times forward earnings I view Caretech as one company fit for both growth and income investors.

You can’t escape this stock 

Longer lifespans are great for everyone except funeral homes such as the UK’s largest, Dignity (LSE: DTY). Shares in the company dropped over 15% in a single day last month after the company warned that lower numbers of deaths in 2017 and increased competition had forced it to lower medium term earnings growth targets.

This was especially bad news as Dignity has been priced for significant growth for some time as investors bet on the company gaining market share through steady organic growth and bolt-on acquisitions. The company’s share price has made up some lost ground since then and shares are now back to trading at a full 19.9 times forward earnings.

This is a lofty valuation but considering Dignity has a long history of successful acquisitions, raising margins and increasing cash flow it’s not a ridiculous one. But with a low dividend, high debt and a poor trading environment that led management to cut its own growth targets I’ll be steering clear of Dignity at this point.

Dignity may seem like the most recession-resistant share possible but the Motley Fool’s top analysts have gathered five even better non-cyclical defensives in their latest free report, Five Shares To Retire On. These companies all offer great growth prospects, high moats to entry for competitors, incredible pricing power and big dividends that have led each of them to outperform the FTSE 100 going all the way back to 1999.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.