Dividends could be the single most misunderstood aspect of stock market investing. Ask your average investor to pick out a good dividend stock, and the chances are they’ll reach for a 5%+ yielder, with little regards to dividend cover or growth. That’s a dangerous strategy, as high yielding stocks can often signal trouble. Just look at Provident Financial’s performance last year.
In my view, there’s a better strategy – dividend-growth investing. This involves investing in companies that are increasing their payouts. One of the main benefits of this strategy is that a rising dividend tends to put upwards pressure on a company’s share price. The result is that investors can benefit not only from the dividends, but from capital gains too, therefore generating healthy ‘total returns.’
Today, I’m looking at two dividend-growth stocks that I rate highly right now. Neither stock has a super high yield, but both have ample dividend coverage and have grown their payouts significantly in recent years.
DS Smith (LSE: SMDS) is a newcomer to the FTSE 100, having joined the index in December. The £5.5bn market cap group is a leading provider of packaging, operating in 37 countries and counting Amazon UK as a key customer.
As a packaging specialist, DS Smith is benefitting from the rise in e-commerce. Revenue jumped 18% last year, and City analysts expect a further 18% growth in sales for FY2018. Half-year results released in early December were solid, with sales rising 19% and adjusted operating profit increasing 11%. Chief Executive Miles Roberts commented: “We continue to see exciting opportunities for growth, both in Europe and in North America, and, accordingly, the Board remains confident about the outlook for DS Smith.”
Analysts expect the company to pay 16.3p per share in dividends this year, which equates to a healthy yield of 3.2% at the current share price. Coverage is anticipated to be strong, at 2.1 times. Recent dividend growth is impressive, with the payout rising over 50% in the last three years. Analysts expect further growth of 7.2% this year and 8.4% next year.
Turning to the valuation, DS Smith currently trades on a forward P/E of a reasonable 15.1. As a result, I believe the stock is positioned well to provide investors with capital growth and dividends in the medium-to-long term.
Looking outside the FTSE 100, I also like the dividend prospects of international transport company National Express (LSE: NEX). The group is well diversified geographically, now generating around 80% of its earnings outside the UK, with operations in North America, Europe, Africa and the Middle East
Half-year results released in October were decent, with group revenue rising 6.4% and normalised profit before tax up 12.3%. The company said it was on track to deliver its profit, free cash and leverage targets for the year.
The £2bn market cap company has recorded seven consecutive dividend increases now, with the payout increasing from 6p per share in 2010 to 12.3p per share in 2016. For FY2017 and FY2018, analysts expect further growth of 10% and 9%, which takes the prospective yields to 3.5% and 3.8% at the current share price. Coverage for FY2017 is forecast to be around 2.1 times.
Trading on an estimated P/E of 13.6, shares in National Express look attractively valued. Long-term shareholders could be rewarded with solid total returns, in my view.
Edward Sheldon owns shares in DS Smith. The Motley Fool UK has recommended DS Smith. 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.