Dividend growth could become a more important aspect of investing during the course of 2018. With Brexit now just over a year away, uncertainty surrounding the future prospects for the UK economy could ramp-up further. This could cause sterling to come under pressure, and this may push inflation higher. The end result could be a more challenging environment for income investors.
That’s why Barclays (LSE: BARC) and other shares with fast-growing dividends could be of interest. Alongside this financial services sector peer, the bank’s share price could be positively catalysed by a more optimistic dividend outlook.
Under its current management team, Barclays has been a rather disappointing income stock. It decided to hold dividends at 3p per share in recent years in order to focus on improving the strength of its balance sheet. While this may lead to better capital ratios which could provide a more stable growth outlook for the long term, it means that investors in the company have had to make do with a dividend yield of around 1.5% or less.
With inflation recently moving to over 3%, this means the stock has failed to offer a real income return. But with earnings due to rise by 32% this year and 14% next year, the prospects for income investors could be about to dramatically improve. The company is forecast to raise dividends per share to 5.5p in 2018, followed by further growth to 8.2p in 2019. This is an annualised growth rate of around 65% and puts the company on a forward dividend yield (for 2019) of 3.9%.
This could appeal to investors if inflation remains high. The market does not yet appear to have priced-in the rising profitability and shareholder payouts that are expected. Evidence of this can be seen in the stock’s price-to-earnings growth (PEG) ratio being a rather lowly 0.7. As such, now could be the perfect time to buy it for the long run.
Also offering strong dividend growth potential is private and commercial banking specialist Paragon (LSE: PAG). The company released a first quarter update on Monday which showed it continues to make good progress with its strategy. New lending increased by 65% compared to the first quarter of 2017, with an increasing proportion of complex buy-to-let lending flows following the PRA rule changes. With growing demand and opportunity within specialist UK lending markets, the company’s outlook appears to be positive.
In fact, Paragon is forecast to post a rise in its bottom line of 8% this year, followed by further growth of 11% next year. This puts it on a PEG ratio of 0.9 and means that there could be significant upside potential on offer. It also means that dividend growth could be high and with the stock expected to yield 4.1% from a dividend which is covered 2.6 times by profit in 2019, it could become a popular income share over the medium term.
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Peter Stephens owns shares in Barclays. The Motley Fool UK has recommended Barclays. 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.