Companies with the capacity to raise dividends at a fast pace may perform well in the next few years. Uncertainty regarding Brexit and its potential impact on the UK economy remains high, and rising dividends could suggest a business has confidence in its future outlook. A rising dividend may also help investors to overcome an inflation rate which is set to move higher from its current level of 3.1%.
With that in mind, here are two companies with high dividend growth potential. Buying them now could be a shrewd move.
Reporting on Wednesday was Frenkel Topping (LSE: FEN), a specialist independent financial advisor and asset manager focused on asset protection for vulnerable clients. The company has recently been undertaking a detailed review following changes to its management team. It now believes that the potential addressable market available to the company is broader than that which it has previously targeted. It has therefore made investments in its cost base in order to restructure the business.
This could provide the business with higher sales and profit growth potential in the long run. Certainly, it will lead to reduced profitability in the short run, and that could be why the company’s shares are down 10% following the update. However, with a larger potential market from which to seek new business, the company’s future could be brighter following its strategic review.
In terms of its income prospects, Frenkel Topping currently has a dividend yield of 2.5%. While this may seem relatively low, the shareholder payouts are covered around 2.4 times by profit. This suggests that there could be significant growth in dividends in future years. With the company now having a larger market to target, its financial performance could improve in the long run.
Also offering the potential for higher future dividends is wealth management specialist Old Mutual (LSE: OML). It is currently undergoing a major restructuring which will see it split into four separate entities. This is being undertaken in order to improve its efficiencies through the prospect of lower costs. It also means there are asset disposals, the latest one of which was for the company’s Single Strategy division for £600m.
With a dividend yield of 3.2%, Old Mutual offers a real income return at the present time. However, in the long run its dividend growth rate could be relatively high. Its shareholder payouts are currently covered three times by profit, which suggests that they are highly affordable and very sustainable.
The company’s price-to-earnings (P/E) ratio of 10.4 suggests that there is a wide margin of safety on offer for new investors. This means that there could be significant upside potential in the long run. In the near term there could be some weakness as investor sentiment may decline to some degree ahead of what is a major change for the business. But with a low valuation, cost-cutting drive and rising dividend, it could be a strong performer in future years.
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Peter Stephens owns shares in Old Mutual. 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.