Since inflation has moved to 3% recently, buying shares which offer high dividend growth potential could be important to income investors. After all, a number of companies may not have the financial flexibility to increase their payout ratios, or may see their earnings growth rate come under pressure as Brexit talks continue.
With that in mind, here are two companies which appear to offer a potent mix of high yields and dividend growth. As such, they could provide inflation-beating returns over a sustained period.
Reporting on Thursday was designer, manufacturer and seller of fantasy miniatures Games Workshop (LSE: GAW). The company’s share price increased by 9% in response to what was a relatively short update. It stated that sales have continued to be strong since the previous announcement in September. Due to the high operational gearing of the business, any movement in sales is directly reflected in profitability. As such, the company’s profits have been well ahead of the same period from the prior year.
In fact, the company is forecast to report a rise in its bottom line of 50% in the current year. This would be an impressive performance given the uncertainty which surrounds the UK economy at the present time. Consumer confidence is deteriorating, but Games Workshop does not appear to be feeling any ill-effects.
With a price-to-earnings growth (PEG) ratio of just 0.3, the company appears to have capital growth potential. However, it is its income prospects which may hold the greatest appeal to investors. Its dividends are covered 1.4 times by profit, which suggests that they could rise rapidly over the medium term. This could increase the dividend yield of 4.6% at a fast pace in future years. As such, now could be the perfect time to buy it.
Also offering high dividend growth potential is convenience store operator McColl’s (LSE: MCLS). The company is expected to record significantly improved performance over the next couple of years, with its bottom line due to rise by 8% this year and by a further 29% next year.
This could help to boost its dividend growth rate. Currently, the company has a dividend yield of 3.8%. However, dividends are set to be covered more than twice in the next financial year. This suggests that they could rise at a rapid rate in future years – especially since the convenience store sector is continuing to see relatively strong demand.
As well as its dividend outlook, McColl’s also has investment potential because of its valuation. Despite strong earnings growth forecasts, it trades on a PEG ratio of just 0.4. This suggests that it could post high share price returns even after it has risen by over 50% in the last year. Certainly, consumer confidence is weak as Brexit talks continue. But with a wide margin of safety and a bright income future, the company seems to be a strong buy right now.
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Peter Stephens owns shares of McColl's. 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.