Dividend stocks could be a shrewd investment over the medium term. Despite inflation rising to 3.1% last month, there are a number of stocks which offer significantly higher dividend yields that look set to remain above inflation. As well as this, some shares could post impressive rates of dividend growth in future years. This combination of a high yield and growing dividends at a time of higher inflation could act as a catalyst on their share prices.
With that in mind, here are two which appear to offer a mix of rising dividend and appealing yields.
Reporting on Monday was specialist accident management, legal services, fleet management and niche insurance product provider Redde (LSE: REDD). The company’s trading since its full-year results announcement on 7 September and AGM statement on 25 October has been positive. Sales have continued to show an increase over the corresponding period of the previous year. This reflects growth in trading volumes, with trading profits being ahead of the prior year period.
As well as impressive operational performance, Redde’s investment case is centred on its dividend. The stock currently has a dividend yield of 6.8%, which is above and beyond the current rate of inflation. It also has a solid track record of dividend growth. For example, in the last three years, shareholder payouts have increased at an annualised rate of around 12.2%.
While Redde’s dividends are barely covered by profit at the present time, the company seems to have a solid business model. It is due to post growth in earnings of 2% in the current year and with its strategy seemingly sound, it could continue to offer inflation-beating dividend growth over the long run.
Also offering an upbeat outlook for income investors is British Airways-owner IAG (LSE: IAG). Its performance in the last few years has been exceptionally strong, with the company being able to restart dividends after a period of difficulties. In fact, dividends per share have increased by a third over the last two years. Yet they are still covered 3.7 times by profit, which suggests that they could increase at a significantly faster rate than profit and remain highly sustainable.
Looking ahead, IAG is expected to post a rise in its bottom line of 5% in the current year, followed by further growth of 7% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1, which suggests that as well as a fast-growing dividend, the stock could have upside potential.
Certainly, the airline industry is highly cyclical. But with a wide margin of safety and encouraging growth potential, now could be a good time to buy the diversified airline stock. As well as this, it has a dividend yield of 3.7% at the present time. This is ahead of inflation and could become more appealing if the price level continues to rise.
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Peter Stephens has no position in any shares mentioned. 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.