The rate of inflation moved 10 basis points higher last month. It now stands at 3.1% and could realistically increase in the next few months. This makes dividend investing more attractive to a range of investors, which could mean that demand for dividend shares increases. As such, here are two income stocks that could be worth buying for the long term.
Reporting on Wednesday was manufacturer, recycler and distributor of PVC products Eurocell (LSE: ECEL). The company has experienced challenging trading conditions in the 11 months to 30 November, but is on track to meet full-year guidance. It has experienced good sales growth in the new-build marketplace, while it continues to build its prospect pipeline in the Profiles division. Similarly, trading in the Building Plastics division has been robust, although like-for-like growth rates are slightly below those of the first half of the year.
The company continues to mitigate the increasing cost inflation it is seeing for a range of raw materials including resin. However, there remains a time lag in capturing the benefit. Despite this, the firm is making good progress with its strategy and has been able to invest in business expansion, notably through the acquisition of Security Hardware.
With a dividend yield of 4.2%, Eurocell appears to have dividend appeal at the present time. With dividends being covered 2.3 times by profit, next year’s forecast rise in shareholder payouts of 8.8% appears to be highly affordable. Furthermore, with the company forecast to grow its bottom line by 5% in the current year and by a further 6% next year, its price-to-earnings growth (PEG) ratio of 1.5 indicates that it could offer high levels of capital growth in the long run.
Also offering impressive income prospects is insurance company Direct Line (LSE: DLG). It has a dividend yield of 8.2% at the present time, which includes special dividends. Clearly, there is no guarantee that these will continue to be paid. However, the company has a solid track record of paying them and is expected to do so over the next couple of years. Such a high dividend yield means that the firm’s income return is highly likely to remain well above inflation – even if the price level rises at a rapid rate over the medium term.
As well as its income prospects, Direct Line also has capital growth potential. The company trades on a price-to-earnings (P/E) ratio of just 12.7 at the present time. This suggests that there could be a wide margin of safety on offer following its 5% share price fall in the last three months. As such, with a mix of income potential, low valuation and what is a dominant position within its key markets, the stock appears to offer a favourable risk/reward ratio for the long term. This means that now could be the right time to buy it.
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Peter Stephens owns shares in Direct Line. 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.