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3 attractive dividend stocks whose yields could double

To try and find three of the best dividend growth stocks, I’ve screened the market for companies supporting a dividend yield of 3.2% or more (the market average) with payout cover of more than 2.5 as well as a history of dividend growth.  

Challenging growth 

The first company to appear on the screen is challenger bank OneSavings (LSE: OSB). With a dividend yield of 4% at the time of writing, this upstart meets the first criteria. For fiscal 2017, City analysts are expecting the firm to reward investors with a total dividend of 12.5 p per share, covered 3.9 times by earnings per share, leaving plenty of room for further growth. 

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And analysts are expecting the payout to grow substantially for 2018 with an increase of 27% expected. Assuming the firm meets City forecasts for 2018 (EPS up 6.2% to 51.2p) this payout will be covered 3.2 times by EPS, meaning the company will still have plenty of cash left to reinvest in the business while at the same time rewarding shareholders. 

As well as its attractive dividend yield, OneSavings also trades at a highly attractive P/E multiple of only 7.7. According to the bank’s latest trading update, it looks as if it’s on track to report a record performance in 2017 with loan book “growth of c.20% for the full year.

Cash rich 

The next company that meets my screening criteria is defence contractor QinetiQ (LSE: QQ)

Like OneSavings, this is yet another unloved dividend stock trading at a depressed multiple with room to grow its payout substantially in the years ahead. At the time of writing the shares trade at a forward P/E of 11.8, although unfortunately, City analysts are expecting group EPS to contract by 2.5% for fiscal 2018. 

Still, while this decline is a disappointment, I don’t believe it warrants such a depressed valuation, especially when the rest of the defence industry is trading at a median P/E of 13. 

As well as the low valuation, QinetiQ supports a dividend yield of 3.3%. Over the past six years, this payout has grown by more than 100%, and City analysts expect it to increase by around 5% per annum for the next two years. There’s plenty of room for further payout growth as well with the distribution covered just under three times by EPS. As additional security, QinetiQ has a cash-rich balance sheet with approximately £200m of net cash at the end of the last reported period. 

REIT Income 

Workspace (LSE: WKP) is the final dividend champion I’m going to profile in this piece. This is a real estate investment trust that manages commercial properties let to fast-growing businesses. This model provides a steady stream of income for the firm and its shareholders although, due to the REIT structure, it has to pay out the majority of its income to shoulders, so dividend cover is less than 1.5.

Nonetheless, rapid earnings growth is supporting payout expansion. For fiscal 2018, City analysts believe the company will distribute 27p per share to investors, up from 17p for 2017 and giving a dividend yield of 2.9%. For 2019, the payout is expected to grow by a further 14%, giving a yield of 3.3%. 

And like the two companies listed above, shares in Workspace are going cheap. They are trading at a price-to-tangible-book ratio of 0.9. The firm’s tangible book value was reported as being 1,026p at the end of the last reporting period.

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Rupert Hargreaves owns no share 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.