As well as offering a high income return, dividend shares could also record high capital gains over the medium term. The main reason for this is rising inflation, which may make stocks with high yields increasingly popular. Furthermore, companies which are able to grow shareholder payouts at a rapid rate may become even more in-demand in future years. With that in mind, these two shares could be strong buys right now.
Reporting on Monday was engineering company Costain (LSE: COST). It released an AGM statement which said that the company is trading in line with expectations and it is confident of making further progress in future. Clearly, this is encouraging news for investors and shows that its strategy is performing well despite an uncertain macroeconomic outlook.
While Costain currently yields just 3.1%, it has significant dividend growth potential. Its dividend is covered 2.4 times by profit, which suggests shareholder payouts could rise at a faster pace than the company’s earnings. And with its bottom line forecast to rise by 10% this year and by a further 5% next year, there seems to be scope for a double-digit rise in dividends on an annualised basis over the medium term.
With Costain trading on a price-to-earnings (P/E) ratio of 13.8, it seems to offer excellent value for money. While there may be cheaper options available within its wider sector, Costain’s upbeat growth prospects and dividend growth potential could allow it to deliver outperformance in 2017 and beyond. While not without risk, it appears to be a logical buy at the present time given the outlook for higher levels of inflation.
Also offering income and capital return potential is fellow engineering company Keller (LSE: KLR). Its shares have become more popular among investors in the last six months, which has helped to push them around 32% higher. This means that they now yield roughly 3.2%, which is below the FTSE 100’s yield of 3.8% after the index’s recent pullback.
Despite this, there is scope for a faster-rising dividend than for the wider index. Keller’s payouts are covered over three times by profit at the present time. Certainly, dividend payouts are unlikely to ever equal profits, since some reinvestment for future growth will always be required. But such a high coverage ratio could be reduced and still leave the business in strong financial shape. As such, it would be unsurprising for Keller’s dividend payments to continue to rise following their 32% increase of the last five years.
With Keller trading on a P/E ratio of 10.1, it seems to offer a wide margin of safety. This could mean an upward rerating is on the cards. When combined with its impressive yield and significant scope for increasing dividends, Keller seems to be a sound investment for the long term.
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Peter Stephens 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.