While a high dividend yield may help an investor to beat inflation today, the reality is that the growth of shareholder payouts could be even more important in the long run. Not only could they allow an investor’s income return to move well ahead of inflation in the long run, they also signal to the stock market that the company in question is confident in its future prospects. They may also suggest it has sound financial standing.
With that in mind, Unilever (LSE: ULVR) seems to be a worthwhile buy at the moment. It is set to raise dividends rapidly, although it is not the only company expected to do so.
Over the next year, Unilever is forecast to grow its bottom line by 10%. That’s a strong rate of growth for such a large and diverse business. One reason for its relatively high growth rate is its exposure to the emerging world. It has invested vast sums of capital in promoting its operations in the developing world. While it has taken time for it to achieve a high degree of customer loyalty, it now appears to have done so. This means that volume and pricing growth could be ahead for the business.
Rising profitability should allow the company to generate increasing dividends in future. For example, in the current year it is expected to record a rise in shareholder payouts of 8.9%, which is almost three times the current rate of inflation. With dividends being covered 1.6 times by profit, they could rise at a similar pace to profit growth in the long run without putting the company’s financial position into difficulty. Therefore, while the stock may have a dividend yield of just 3.1% right now, it could have exceptional dividend appeal for the long run.
Also offering impressive dividend growth potential is sports betting and gaming group GVC (LSE: GVC). It released a trading update on Thursday for the fourth quarter of 2017, with the company recording a net gaming revenue figure of €1,009m for the full year. This is an increase of 13% on the prior year. Its EBITDA (earnings before interest, tax, depreciation and amortisation) figure is expected to be at the top end of management expectations, while it remains upbeat about its future potential following the recommended transaction with Ladbrokes Coral.
With GVC’s dividend payments being covered 1.8 times by profit, it appears to have a sustainable dividend payment profile. Shareholder payouts are forecast to rise by 9.5% this year, which puts the stock on a dividend yield of 3.3%. With synergies and efficiencies from the Ladbrokes Coral deal set to be significant, the company’s income prospects appear to be upbeat. A larger business with more size and scale may have a competitive advantage over rivals, which could increase its rate of profit growth in the coming years.
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Peter Stephens owns shares in Unilever. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended GVC Holdings. 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.