Two dividend growth stocks I’d buy today

Edward Sheldon looks at two attractively valued stocks that have lifted their dividend payouts significantly in recent years.

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Today I’m looking at two stocks that have increased their dividend payouts significantly in recent years. Despite the strong dividend growth, neither stock looks particularly expensive right now.

Crest Nicholson

Over the last four years, housebuilder Crest Nicholson (LSE: CRST) has been a dividend growth investor’s dream, paying out dividends of 6.5p, 14.3p, 19.7p and 27.6p. With analysts forecasting a payout of 34p for FY2017, a huge yield of 6.3% could be on offer.
 
Often, when a yield is that high, it’s worth approaching with caution, as it could be a signal from the market that a dividend cut is on the horizon. However Crest Nicholson released half-yearly results on June 13, and there was no reason to believe that the dividend might be in danger any time soon.
 
Revenue for the six months to the end of April increased 3%, profit before tax rose 5% and basic earnings per share jumped 5%. Furthermore, the housebuilder hiked the dividend by an impressive 23% to 11.2p, a signal of confidence from management. The company stated that “the outcome of the UK General Election may introduce some uncertainty in the short term but we expect the new-build housing market to remain robust.” 
 
Crest Nicholson’s share price has pulled back around 15% since mid-April, and at the current level of around 540p, leaves the stock trading on an amazingly low P/E of around eight. So what’s the catch here?
 
Well, investors should bear in mind that housebuilding is a cyclical business, and in the event of a significant economic downturn or collapse in the property market, profitability at Crest Nicholson could suffer and the dividend could be at risk. Perhaps the market believes that we’re nearing the top of the cycle.
 
However, with dividend coverage of 2.25 times last year, and sales of £540m in the pipeline, I think there could be further room to run, as the company has said it is “well positioned to continue to deliver strong operational and financial performance in the medium term.” 

WPP

Another company that has seen its share price drift lower recently is WPP (LSE: WPP). The advertising giant warned in March that global economic and political uncertainty may lead to a slowdown in growth this year, and its shares have slumped from above 1,920p to around 1,660p as a result. 

Buying high-quality companies when they’re a little out of favour can be a rewarding strategy in the long term, and I reckon the 14% slump in the share price might have provided an interesting opportunity. That’s because WPP has an excellent dividend growth history and in the last three years alone has increased its dividend payout from 34.2p to 56.6p, a compound annual growth rate (CAGR) of 18%.
 
Although revenue is forecast to fall 6% this year, analysts still expect a dividend increase of around 11%. That would take the dividend payout to 63p per share, a yield of around 3.8% at the current share price. On consensus FY2017 earnings forecasts of 126.3p per share, WPP trades on a forward-looking P/E ratio of 13.2, which I believe is relatively good value for a stock with the track record of growth that WPP has.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon 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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