Dividend growth could become a more popular investment style over the medium term. Inflation has already moved to around 3%. Looking ahead, uncertainty surrounding Brexit could cause investor confidence in the UK economy and its currency to decline. This may lead to an even higher rate of inflation, which may mean that companies with good track records of dividend growth become increasingly in demand.
With that in mind, here are two stocks which could be worth a closer look. They have dividend growth potential as well as impressive business models for the long term.
Having endured a challenging number of years, the future for diversified resources company BHP Billiton (LSE: BLT) appears to be relatively bright. The company has made numerous changes to its business model in recent years that seem to have improved its sustainability and profit growth potential. For example, it has spun-off various assets into a new entity, South32. This has helped BHP Billiton to become more focused on its low-cost asset base, where it could have a competitive advantage versus a number of its industry peers.
With commodity prices having risen somewhat in recent months, the company’s profit growth prospects have improved. It is expected to record a rise in its bottom line of 13% in the current year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.9, which suggests that it could offer significant upside potential.
With dividends being covered 1.6 times by profit, they appear to be highly sustainable. They could move higher if profit growth remains robust. This seems relatively likely, since the supply surplus of various commodities including oil now looks to be significantly reduced. This may mean that the prices of oil, iron ore and other commodities increase in future and lead to higher profit and dividend growth for the company over the long run.
Also offering dividend growth potential at the present time is UK property investment company Palace Capital (LSE: PCA). The company focuses on commercial property that is mainly outside London and reported positive first-half results on Monday. They showed that dividends increased by 5.6%, while the value of its property portfolio increased by 10.7%. Its average cost of debt remains relatively low at 2.9%, while its overall occupancy rate of 89% suggests that demand for commercial property remains high.
Total return potential
In the last three years, the company has increased dividends per share by around 47%. It could have scope to raise shareholder payouts yet further in future, with its outlook being relatively positive. For example, next year it is expected to increase its bottom line by around 5%. Since it trades on a price-to-book (P/B) ratio of just 1.4, it could also have capital growth potential.
With a dividend yield of 5.5%, Palace Capital could offer a high income return. As well as this, its low valuation and dividend growth potential mean it could be worth buying for the long run.
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Peter Stephens owns shares in BHP Billiton. 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.