Inflation could prove to be a challenging obstacle to overcome for many income investors. It currently stands at 3% and is forecast to move higher. Although an interest rate rise may be ahead, its impact on inflation may be limited due to fears among policymakers of choking off the UK’s economic performance. As such, a sustained period of higher inflation may be ahead.
Vodafone (LSE: VOD), with a dividend yield of 6.1%, may therefore have instant appeal to dividend investors as it’s unlikely to be surpassed by inflation – even over the long run. As well as a high yield, though, the company could alo offer dividend growth as a resilient financial performance could help an investor to generate a seven-figure portfolio.
A growing opportunity
In recent years, the company’s strategy has been called into question by a number of investors. The decision to sell its stake in Verizon Wireless was seen as somewhat questionable, since it reduced its exposure to the US and also left it with arguably less growth potential, especially as the Eurozone economy was struggling at the time. However, the deal now makes sense, since Vodafone was able to make acquisitions in Europe and reinvest in its products and services in order to provide significant growth opportunities for the long run.
Those opportunities are now starting to bear fruit. The company is forecast to post a rise in its bottom line of 5% this year, followed by further growth of 20% next year. This could stimulate dividend growth over the medium term, which could make the company even more enticing from an income perspective.
As well as its dividend growth potential, the stock also has capital gain prospects. Despite a high forecast growth rate in earnings, it trades on a price-to-earnings growth (PEG) ratio of only 1.3, which suggests that it is undervalued. For a business which is generally viewed as defensive, due to its geographical spread and range of products and services, this seems to be a very attractive price to pay.
More dividend options
Of course, there are other strong dividend stocks on offer elsewhere. One example is the UK developer and constructor of multi occupancy assets, Watkin Jones (LSE: WJG). The company reported on Tuesday that it has achieved its operational objectives for the year and that it expects to report underlying earnings in line with previous guidance.
The company may have a dividend yield of just 2.8% at present, but its dividend growth prospects appear to be very high. It has a payout ratio of around 50%, which suggests that it could present a higher proportion of profit as a dividend without compromising its financial strength. Furthermore, with earnings due to rise by 13% next year, there could be additional scope for dividend growth. And with a PEG ratio of 1.1, it appears to offer good value for money.
Alongside Vodafone, Watkin Jones could be a worthwhile holding for income investors. With inflation forecast to rise, their dividend growth potential in particular could be a major ally in future years.
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Peter Stephens owns shares in Vodafone and Watkin Jones. 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.