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2 much-loved dividend growth stocks to buy for 2017

Over the last five years, the FTSE 100 has risen by 32%. While that may sound like a strong return, it equates to an annualised return of 5.7%. When dividends of around 3.5% are added to this figure, it is roughly in line with the long-term average for the index. During the same time period though, a number of shares have generated significantly higher returns. Here are two which have done so, and which could still be worth buying this year.

Growth potential

Reporting on Thursday was packaging and paper company Mondi (LSE: MNDI). Its underlying operating profit for the first quarter was 6% lower than in the same period of the prior year. Strong sales volumes were more than offset by a substantially lower forestry fair value gain, as well inflationary cost pressures and lower average selling prices. These challenges are due to continue in the near term, although the company is making progress in passing on higher input costs to customers and continues to experience high levels of demand.

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In the last five years the Mondi share price has risen by 270%. Looking ahead, further share price growth could be on the cards. One potential catalyst is its scope for higher dividends. Currently, it pays out just 41% of profit as a dividend. This figure could be increased dramatically, while leaving the business with sufficient capital through which to invest for future growth.

In fact, in the current year dividends are due to rise by around 11%, followed by further growth of 5% next year. This may put the company’s shares on a relatively low forward yield of 2.8%, but additional growth could lead to increased appeal from an income perspective. This could help to push Mondi’s share price higher over future years.

Low valuation

Also making gains in the last five years have been shares in fellow packaging company, Macfarlane Group (LSE: MACF). Its shares are up 240% during the period, and yet they continue to trade on a relatively low valuation given the company’s growth potential.

For example, over the next two years the business is expected to report a rise in its earnings of 21% and 8% in 2017 and 2018 respectively. This puts its shares on a price-to-earnings growth (PEG) ratio of just 1.3, which suggests that they remain undervalued.

In terms of its dividend prospects, Macfarlane pays out around 38% of its profit as a dividend. This means that its shareholder payouts could increase at a faster pace than profit over the medium term without putting its growth strategy under pressure. And since its dividend yield currently stands at 3.3%, it offers an inflation-beating yield at the present time.

Certainly, there may be higher-yielding shares on offer right now. But with a mix of growth, value and income potential, Macfarlane seems to be a sound buy 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.

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