While a stock’s dividend yield is of great importance to income investors, its dividend growth potential is also highly significant. Certainly, in the short run, a stock with a high yield will offer a greater income return than a company with a lower yield and a fast-growing dividend. However, in the long run the latter may generate a higher total return as investor sentiment warms to its improving income prospects. With that in mind, these two companies could be worth buying right now.
Reporting on Tuesday was housebuilder Redrow (LSE: RDW). Its full-year results showed a rise in its dividend payout of 70%. It was able to increase its shareholder payout at such a rapid rate because of its improving financial performance. Its revenue moved 20% higher, while its pre-tax profit was a record £315m, which is 26% higher than the previous year’s £250m.
The company’s growth strategy has continued to deliver impressive results. Legal completions were up 15%, while the number of outlets and employees rose by 3% and 12%, respectively. Further growth in all of these areas is expected over the medium term, with the company benefitting from rising demand for new homes and a lack of supply. A loose monetary policy is also keeping mortgage availability high, and this situation looks set to continue into the next financial year.
With a dividend yield of 2.7%, Redrow is not necessarily a strong income stock in the short run. Inflation is only 10 basis points lower than its income return, for example. However, with earnings due to rise by 8% next year and dividends being covered over four times by profit, the scope for a higher level of shareholder payout in future is high. This could make the company a stunning income play for the long term.
Also offering a surprisingly impressive income outlook for the long term is gold miner Randgold Resources (LSE: RRS). It currently yields just 1.9%, but has the potential to deliver rapid dividend growth in future. One reason for this is its strong balance sheet, with the company having cash of $573m and no debt. This should provide it with sufficient capital for its exploration and development programme over the medium term and means it may be able to pay out a relatively high proportion of profit as a dividend each year.
At the present time, Randgold Resources has a payout ratio of 61%. This is expected to rise to around 70% next year and it would not be a major surprise if it headed higher in future years. Alongside this, the company is forecast to increase its bottom line by over 20% per annum during the next two years as a higher gold price, increased production and a more efficient business model combine to generate higher profitability. As such, the company’s dividend prospects appear to be impressive and it could become a must-have income share in the long run.
Peter Stephens owns shares in Randgold Resources and Redrow. The Motley Fool UK has recommended Redrow. 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.