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One dividend growth stock I’d buy alongside Centrica plc

Centrica (LSE: CNA) is one of the FTSE 100’s highest-yielding shares at the present time. In the current financial year it is expected to have a dividend yield of 7.2%. This is more than twice the rate of inflation and could help investors to address concerns about being able to obtain a real income return over the medium term.

However, there are other companies which could do likewise. Reporting on Friday was one stock which could offer high dividend growth potential in the long run.

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Mixed performance

The company in question is iron casting and machining company Castings (LSE: CGS). Its performance in the first half of the year was somewhat mixed. On the one hand, its Foundry operations continued to perform well after a period of production and productivity improvements. They have helped to deliver a rise in sales revenue of 7.9%, with profit being up 10.5% versus the previous period. Further investment is being made in order to support an automation programme that is being rolled out.

However, in the company’s CNC Speedwell Machining operation, revenue decreased by 10.9%. It also delivered a reported loss of £1m versus a profit of £0.8m in the previous period. The business has experienced major issues, such as production problems. They have resulted in a review which has identified additional short-term costs for the business. With changes being made to the Machining business, it is expected to return to profitability in the next financial year.

Dividend potential

With Castings having a dividend yield of 3.1%, it offers a real income return at the present time. However, it is the company’s dividend growth potential which could make it a worthwhile income stock for the long run. Its dividend is covered more than twice by profit. With its bottom line due to rise by 13% in the next financial year, this could provide it with scope to increase shareholder payouts at a brisk pace. And since it trades on a price-to-earnings growth (PEG) ratio of just 1, it also appears to offer capital growth potential.

Similarly, Centrica could also increase dividends in future. The company is making major changes to its business model, and they are expected to create a business which is able to deliver greater profitability in the long run. In fact, as soon as next year the company is forecast to grow its bottom line by 2%. This means that its shareholder payouts are due to be covered 1.3 times by profit, which suggests there could be scope for them to grow.

Uncertainty

Clearly, both stocks are experiencing uncertain periods at the present time. However, they both appear to have sound strategies which could lead to stronger performance in the long run. Therefore, now could be the right time to buy them while they offer relatively wide margins of safety. Doing so could mean higher income returns in the long run.

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Peter Stephens owns shares in Centrica. The Motley Fool UK has recommended Castings. 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.