Dividend investing is a proven wealth-creator. Simply throw what you receive back into quality stocks and, through a combination of patience and the tendency of equities to outperform all assets over the long term, you’re likely to be sitting on a far larger sum of money in a few decades’ time.
That said, investors shouldn’t automatically buy those companies offering the largest yields. To really get the benefits from this strategy, you need to be looking to those that are growing their payouts. Here are just two examples.
I suspect fantasy figure designer and manufacturer Games Workshop (LSE: GAW) was under a lot of investors’ radars a year ago. Those days are gone. Over 12 months, the stock has soared a quite superb 250%, boosted by the fall in sterling and the fact that the company makes three-quarters of its sales overseas.
Based on the update released earlier this month, this positive momentum looks set to carry on for a while yet. While light on detail, it did state that trading in the first quarter of the financial year had “continued strongly” and that sales and profits for 2017/18 were already “well above” those achieved over the same period in 2016/17.
Recent performance isn’t the only reason to take notice of Games Workshop though. For the current year, shares are forecast to yield a chunky 5.5% thanks to a mooted 82% rise in the total payout. Contrast this with the single-digit rises expected from many of our largest companies and the case for seeking income from businesses lower down the market spectrum becomes a lot more convincing.
Unlike other multi-bagging stocks, Games Workshop’s stock also remains sensibly valued. Assuming nothing happens on the world stage to scare or delight investors over the weekend, the shares will be trading on just 13 times forecast earnings on Monday.
Dividend hike hero
Market minnow Zytronic (LSE: ZYT) is another stock that’s performed admirably in recent times. Since last September, the share price of the developer and manufacturer of touch sensor products has climbed no less than 57%, further underlining the ability of small-cap stocks to generate substantial returns for holders over short periods.
Capital gains aside, Zytronic also scores highly when it comes to dividends. A forecast 2.8% yield in the current year might feel average but a quick check shows that this company is no slouch when it comes to hiking its annual payouts. With the exception of 2013 (7%), the £96m cap has consistently raised its total dividend by double-digits for many years now.
Although it’s not updated the market for a while, interim numbers released in May would suggest the Blaydon-based business is continuing to make solid progress. In the six months to the end of March, the company’s top line grew by 14% to £11.3m. Pre-tax profit showed an even bigger percentage increase — rising 39% to £2.5m. And while its earnings outlook can lack visibility at times, analysts are still penciling in a 9% rise for the full year, leaving shares trading on a valuation of 21 times earnings. With a history of delivering relatively high returns on capital and strong operating margins (not to mention its net cash position of £12.5m at the end of March), I think Zytronic warrants consideration.
Paul Summers has no position in any of the 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.