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Two growing dividend stocks that could soon yield 6%+

It’s easy to see which stocks are providing big dividends today, but not those that will be paying out the big cash tomorrow. To get some idea of that, we need to look for progressive dividend policies, strong cash generation, and the potential for future growth.

Software and IT services provider Sanderson Group (LSE: SND) is one that I think fits the bill. The share price has been a bit volatile over the past couple of years, but at 74p today we’re looking at a 55% gain over five years.

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But more important from an income perspective is a dividend that has soared from 1.5p per share in 2013 to 2.65p for the year ended September 2017. That represented an 11% rise over last year, for a 3.6% yield on the current share price. It’s also almost two-and-a-half times covered by earnings per share, so it’s really not stretching the company at all.

Big 5-year jump

With the dividend having risen by 77% in four years, if you’d bought shares around the start of 2013 for about 50p, you’d be earning an effective yield of 5.3% this year on your original purchase price, and the 2.9p forecast for next year would take that to 5.8% — just a shade short of that 6%.

Revenue for the year was largely flat at £21.56m, but adjusted operating profit picked up 5.7% to £3.9m with adjusted basic earnings per share up 18% to 5.2p.

Most importantly (in my view), the firm reported continued strong cash generation which led to a year-end net cash balance of £6.18m — up from £4.34m a year previously and “well ahead of market expectations.

Buying now could lock in some big future returns.

Superior cover

Norcros (LSE: NXR) has exhibited a slightly less spectacular dividend progression in the past few years, but it’s still impressive. From 4.6p in 2013 (adjusting for 2015’s share consolidation), the dividend has grown to 7.14p for the year to March 2017. That’s a rise of more than 55% in four years, which is massively ahead of inflation.

Forecasts suggest a 4% dividend hike this year followed by a further 5.2% next year, which is a slowdown in the rate of growth — but still beating inflation, and I’m happy with it for a couple of reasons.

First, the cash would be more than three-and-a half times covered by forecast earnings, so it’s looking pretty safe. The other thing is that this is while Norcros, which supplies showers, taps, bathroom accessories, tiles and adhesives, is facing difficult trading conditions — and if it’s looking this good in tough times, I’m optimistic about the longer term.

Acquisition

In fact, Norcros looks to be in a good state to benefit from trade headwinds by making acquisitions at attractive prices. On 23 November, the firm competed the acquisition of Merlyn Industries funded by a new £31.4m open offer, with the enlarged company now on a market cap of £145m.

On top of that, debt at the interim stage at 30 September stood at £20.8m, down 24% and not what I’d call remotely troubling, and the company saw fit to lift its first-half dividend by 8.3%.

Forecast yields currently stand at a little over 4%, with the shares on a forward P/E of only around 6.3. I reckon Norcros is a dividend and growth combination to hold for the long term.

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The Motley Fool UK has recommended Norcros. 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.