2 fast-growing stocks with huge dividend potential

When looking for dividend champions, Card Factory (LSE: CARD) might not be the first company that comes to mind. However, it looks as if this firm is a hidden dividend star.

Selling cards and gifts is hardly an exciting business, but it is a lucrative one. For the financial year ending 31 January, the company reported revenue of just under £400m, on which it generated a pre-tax profit of £83m, giving a pre-tax profit margin of 21%. On a cash basis, the company’s returns were even more impressive with £82m in cash generated from operations during the period.

Management designated virtually all of this cash to be returned to investors via special and ordinary dividends. Specifically, management declared a special dividend of 15p and a final payout of 6.3p, giving a total ordinary dividend for the year of 9.1p. Overall, the company earmarked 24.1p per share to be returned to investors via dividends for fiscal 2017, a yield of 7.3%.

It looks as if this trend is set to continue with the group reporting today that trading during its fiscal first half is in line with expectations. 

Rising revenues 

Card Factory announced this morning that sales for the period were up 6.1% year-on-year and like-for-like sales increased by 3.1%. 30 new UK stores were opened in the first half, putting the group on track to open 50 new stores for the full year. What’s more, even though other retailers have announced that they are struggling to cope with higher costs as a result of the introduction of the national living wage and foreign exchange movements, Card Factory has informed investors today that despite these factors, it “remains highly cash generative.” So it looks as if another special dividend is on the cards for investors for fiscal 2018. 

Another special dividend of 15p per share coupled with a modest 5% increase in the regular payout would give an estimated dividend yield of 7.5%. Unfortunately, the shares don’t come cheap trading at a forward P/E of 15.4. Still, the market-beating dividend yield more than makes up for the high valuation.

Cheap income 

If you’re on the lookout for more reasonable income play, homebuilder Taylor Wimpey (LSE: TW) is currently trading at a forward P/E of 9.7. According to City forecasts, the group is set to return 13.2p per share to investors via dividends for 2017 as a whole, giving an estimated dividend yield of 7.1%. For 2018, the company’s cash return plan is expected to remain broadly the same, albeit with a slight increase. City analysts have pencilled in the dividend payout per share of 14.4p for a yield of 7.8% at current prices. 

Unlike Card Factory, Taylor has a cash rich balance sheet. At the beginning of July, it had net cash of £429m compared to Card Factory’s net debt balance of £146m, up from £122m at the end of its fiscal first half.

Still, while Taylor might have the better balance sheet, the company’s exposure to the highly cyclical UK property market may put some investors off. If this does concern you, Card Factory might be the better income buy.

Make money, not mistakes

Dividends have the potential to more than double your investment returns, but unfortunately, most investors fail to capitalise on this. Indeed, according to financial research firm DALBAR the average investor underperforms the wider market by around 5.3% annually thanks to over-trading

To help you avoid this key mistake, and others, the Motley Fool has put together this free report entitled The Worst Mistakes Investors Make. 

The report is a compilation of mistakes that can cost you thousands over your investing career but are easily avoidable. Click here to get your free copy today.

Rupert Hargreaves 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.