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2 dividend growth stocks I’d consider buying in May

With inflation continuing to rise and forecast to move higher, stocks offering high levels of dividend growth could become more attractive to investors. In other words, a high yield may be insufficient if inflation remains stubbornly high over the medium term. Therefore, buying companies with low payout ratios and earnings growth potential could be a sound strategy. Here are two prime examples which could be worth buying today.

Mixed performance

Reporting on Thursday was specialist risk insurer Beazley (LSE: BEZ). Its trading statement for the first quarter of 2017 showed it has made a good start to the year, although its gross written premiums fell by 2%. Its premium rates on renewal business decreased by 1%, which is generally in line with the company’s expectations.

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Looking ahead, Beazley has clear growth potential. Its recent acquisition of Creechurch Underwriters expands its speciality lines presence in Canada. This forms part of what appears to be a sound strategy to develop its non-US speciality lines business. Alongside this, the company will continue to focus on growth in the US, while also reorganising its life, accident and health business as well as political risks and contingency divisions. They will come together and could deliver synergies and improving profitability in the long run.

With Beazley trading on a price-to-earnings (P/E) ratio of 14.8, it seems to offer value for money at the present time. It yields 3%, which is 80 basis points lower than the FTSE 100’s dividend yield. However, with the company’s dividends being covered 2.3 times by profit, there appears to be scope for growth over the long term. Together with an upbeat outlook for the business given the changes it is making, now could be the right time to buy it.

Growth at a reasonable price

Also offering scope for higher dividends in future years is diversified property and casualty reinsurance specialist Novae Group (LSE: NVA). It currently pays out just 40% of its profit as a dividend. This figure could increase in future years and still provide the business with sufficient capital through which to invest for growth. As such, it would be unsurprising for dividend growth to at least match profit growth over the medium term.

Novae Group is forecast to record a rise in its bottom line of 17% in the current year, followed by further growth of 33% next year. This suggests a double-digit rise in shareholder payouts is on the cards. This could help to make the company’s dividend appeal much higher – especially since it currently has a rather lowly yield of 2.6%.

With Novae Group trading on a P/E ratio of 17.8, it seems to offer upside potential. When its rating is combined with the aforementioned growth rates, it equates to a price-to-earnings growth (PEG) ratio of just 0.7. This suggests that as well as strong income potential, it also offers scope for a significantly higher valuation.

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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.