While shares with high dividend yields are undoubtedly app1ealing in the short run, dividend growth could be more important in the long run. A business which is rapidly increasing its dividends each year could suggest to investors that it is very confident in its future prospects. This may lead to a rising share price as the stock market becomes more willing to place a premium valuation on the company in question.
In the last five years, global software company Micro Focus has delivered highly consistent earnings expa. In fact, its bottom line growth rate has been 14% per annum during the period, with rises recorded in four of the five years. This shows that the company offers a degree of consistency as well as the potential for high growth.
During the same time, dividends have more than doubled. This shows that the company has had sufficient cash flow available to reinvest for future growth. Last year, shareholder payouts were covered 1.6 times by profit. This shows that they remain affordable even after such a sharp rise in recent years. This suggests that more dividend growth could be ahead, and that the rise in shareholder payouts may continue to outpace earnings increases without hurting the company’s financial standing.
Following the acquisition of HPE, Micro Focus appears to have improved growth potential. It also has a more diverse and potentially less risky business model. In the current year its bottom line is forecast to rise by 20%, followed by further growth of 13% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.4. Given its size, scale and strong position in key markets, this seems to be a very attractive price to pay.
Looking ahead to its dividend, the company is expected to record a rise of 9% next year. Since this is three times higher than the current rate of inflation, it suggests that even with a dividend yield of 2.6% today, the company could become a sound income stock over the long run.
Also offering high dividend growth potential is independent technology group Cohort (LSE: CHRT). It reported an acquisition as well as a trading update on Monday. It has acquired a further 23.09% of EID for just under €4m. This brings its total holding to 80%, with the Portuguese government holding the remaining 20% of the supplier of advanced electronics, communications and command and control products.
Cohort is on track to meet expectations for the full year. The company is forecast to deliver a rise in earnings of 4% this year, followed by further growth of 6% next year. This puts it on a PEG ratio of 1.7, which suggests it offers good value for money. And with dividends due to rise by 10% this year and yet still set to be covered over three times by profit, the company’s forward dividend yield of 2.9% could become very attractive in the long run.
Peter Stephens owns shares in Micro Focus. The Motley Fool UK has recommended Cohort and Micro Focus. 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.