While buying shares with high yields may be a sound strategic move given the prospect of higher inflation, stocks which can offer strong dividend growth prospects could be even more attractive. Certainly, they may not offer a stunningly high dividend yield at the present time as some other companies are able to do. However, in the long run they may see investor sentiment improve dramatically and also provide a high total return. As such, buying these two companies could be a good move for income investors.
A successful period
Reporting on Monday was branded business park operator in Germany Sirius Real Estate (LSE: SRE). The company announced a successful six-month period to 30 September, which saw continued investment in its asset base as well as the raising of equity capital to support further acquisitions.
Lettings activity during the period was driven by strong occupational demand from the German SME market for both conventional and flexible workspace. This allowed the company to deliver a like-for-like annualised rental increase of 2%. A major capex programme was a key contributor to this increase, with sub-optimal space being transformed into either prime lettable space or one of the company’s premium Smartspace products.
The company was also able to secure rate increases through active asset management. For example, its like-for-like average rate per square metre increased from €5.11 to €5.17. Its in-house lead generation helped to attract new tenants, which means it does not depend on external brokers.
With Sirius Real Estate forecast to post a rise in its bottom line of 14% next year, it trades on a price-to-earnings growth (PEG) ratio of just 1. This suggests it has capital growth appeal, while its dividend yield of 4.5% is also impressive compared to a number of its peers. Since its dividend is covered 1.4 times by profit, there could be significant growth ahead for the company’s investors.
Also offering a high chance of dividend growth over the medium term is plumbing and heating products distributor Ferguson (LSE: FERG). The company, formerly called Wolseley, has a strong track record of increasing dividends on a per share basis. They have risen from 66p per share in 2017 to 110p per share in 2017. That works out as an annualised growth rate of 13.6%, which is clearly well ahead of inflation.
Despite such a rapid growth in dividends during the last four years, Ferguson’s shareholder payouts are still covered 2.6 times by profit. When combined with the prospect of earnings growth of 9% next year, this means that dividends could move higher at a rapid rate over the medium term. Certainly, the stock may have a dividend yield of just 2.1% at the present time. However, over a multi-year time period its income return and capital growth potential could be relatively high.
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Peter Stephens 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.