With the rate of inflation already standing at 3% and forecast to move higher, finding stocks with high dividend growth potential could become a priority for many investors. After all, even high-yielding shares may see their income return fall in real terms if, as expected, the rate of inflation moves higher.
That’s why Legal & General (LSE: LGEN) could be a shrewd investment. It has an excellent track record of raising dividends, and it appears set to continue this trend in future. However, it’s not the only stock which could be worth buying today for its dividend growth potential.
Reporting on Monday was speciality chemical company Synthomer (LSE: SYNT). Its third quarter trading update showed that it is performing in line with expectations, which means it is on target to meet its full-year forecasts.
In Europe and North America, third quarter reported volumes and unit margins were in line with the same period of last year. This was despite some weakness in Dispersions for Construction and Coatings applications, which were offset by strong performance in Latex for the Paper and Foam markets.
In Asia and the Rest of the World, the company’s performance was also in line with expectations. Volumes were flat versus the same period of last year, with the underlying market for Nitriles continuing to grow at more than 10%. This should help the business to deliver sustainable growth while it also seeks to evaluate potential acquisition opportunities.
In the last five years, dividends paid by Synthomer have increased from 5.5p per share to just under 12p per share. This is an increase of around 115%, and yet the company’s dividend coverage ratio remains highly sustainable. It stands at 2.5, which suggests that there could be further dividend growth ahead over the medium term.
Similarly, Legal & General has increased dividends per share by 100% over the last five years. It has a dividend coverage ratio of 1.6 times at the present time, and this indicates that more dividend growth could be ahead. Such a large level of headroom when making payouts to shareholders for both companies could mean that they are able to offer dividend growth rates which exceed inflation in 2018 and beyond.
As well as high dividend growth prospects, both companies appear to offer wide margins of safety at the present time. Legal & General has a price-to-earnings (P/E) ratio of 10.7, while Synthomer’s P/E ratio of 17 also suggests that there could be upside potential ahead. Both stocks are expected to deliver positive earnings growth this year, which could provide a further boost to their dividend growth rates.
Certainly, neither stock may be able to double their dividends in the next five years as they did in the last half-decade. But they should be able to beat inflation, which could make them worthwhile buys for the long term.
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Peter Stephens owns shares in Legal & General. 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.