There are two components to a company’s dividend that should have great appeal for investors. A starting yield at a decent level above interest on cash, and good prospects of the company increasing the payout at a faster rate than inflation in future years.
Such stocks offer investors living off the dividends a rising real income and investors reinvesting dividends a turbo-charge to the compounding of their capital growth. Today I’m looking at two FTSE 250 stocks that I believe fit the bill nicely.
Strong performance
Leading UK self-storage specialist Big Yellow Group (LSE: BYG) today released results for its half year ended 30 September. A strong occupancy performance from its 92 stores saw revenue increase 6%, while higher profit margins drove earnings up 13%. It’s the company’s policy to distribute 80% of earnings, so there was a commensurate 13% increase in the interim dividend to 15.3p.
Ahead of today’s results, City analysts were forecasting a full-year dividend of 29.8p (8% up on last year). The shares are trading 7p higher on the day at 772p, so the forecast full-year payout gives a yield of 3.9%. Forecasts could be upgraded somewhat after today’s results, although the six months to September is the seasonally stronger half.
Favourable outlook
Future prospects for continued strong dividend growth are good. The board today raised its long-held occupancy target of 85%, with the new target being 90%. The company also has a current pipeline of developments that when built out will, increase the lettable area of its estate from 5.4m sq ft to 6m sq ft.
Increasing space and occupancy should drive good revenue growth. At the same time, earnings should grow faster than revenue, due to costs rising at a relatively modest rate. This will be helped by the company having recently reduced its average cost of debt. And with 96% by value of its stores and sites being freehold and long leasehold underpinning the balance sheet, I rate Big Yellow as a solid stock to buy.
Growing internationally
Also sporting a good dividend yield and rising payout prospects is National Express Group (LSE: NEX). Its UK bus and coach business is long established and well known, but around 80% of earnings now come from outside the UK. The company has fast-growing businesses in North America, Spain and Morocco, as well as rail operations in Germany.
The internationally diversified portfolio of cash-generative businesses supports a bright dividend outlook. Following an 8.4% increase in the payout last year, City analysts are forecasting a 9.9% rise to 13.5p this year. At a share price of 355p, the yield of 3.8% is similar to Big Yellow’s, and also like the self-storage group, National Express is forecast to deliver high-single-digit annual increases for the foreseeable future.
The board’s prudent policy is to pay a dividend twice covered by earnings. Cover is currently running a little stronger than that, which provides comfort, as does reasonable gearing and the company’s commitment to maintaining an investment grade credit rating. Again, this is a stock that looks a solid buy to me.
