Finding companies with strong dividend growth prospects can be challenging. That’s especially the case at a time when inflation is high and stock markets having risen in recent years. With demand for dividend growth high among investors, many of the best opportunities may now lack wide margins of safety.
Despite this, there are still some dividend growth stocks which could be worth buying for the long run. Here are two prime examples that may be worth a closer look.
Reporting on Tuesday was FTSE 250 chemicals specialist Elementis (LSE: ELM). The company was able to deliver revenue growth of 27% in the 2017 financial year, with strong organic revenue growth of 11%. Its adjusted operating profit moved 32% higher during the period, with gains seen across Specialties, Chromium and Surfectants.
Its growth strategy appears to be having a positive impact on its overall performance. A portfolio transformation is continuing according to its plan, developing a more focused and higher quality business. Further strategic momentum is anticipated in 2018, which could have a positive impact on its share price.
While a dividend yield of 2.4% may lack income appeal at present, growth prospects here appear to be highly enticing. It pays out just 43% of profit as a dividend, which suggests that it could raise the return at a faster pace than profit without hurting its financial standing. And with its bottom line due to increase by 11% this year, its current strategy could lead to a high total return in the long run.
The last couple of years have been incredibly challenging for Royal Mail (LSE: RMG). The company has seen investor sentiment decline severely, with its share price moving lower resulting in a relegation from the FTSE 100. Investors seem to be concerned about the risks facing the business in terms of strike action and political risk.
However, the stock has been able to deliver a sharp turnaround in recent months. Its shares have gained nearly 50% in less than four months. One reason for this recovery could be the continued delivery of the company’s strategy, with its international operations offering growth potential and its efficiency drive in the UK making it more competitive.
So the prospects for the business appear to be bright, with demand for parcel delivery in the UK continuing to remain robust. This is expected to contribute to a rise in the company’s bottom line in both the current year and next year. And with dividends being covered 1.7 times by profit, there seems to be scope for them to rise over the medium term.
Certainly Royal Mail may not be the most exciting stock in the FTSE 250. However, with a 4.5% dividend yield which could grow by at least as much as inflation, it could prove to be a solid income stock for the long term.
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Peter Stephens owns shares in Elementis. The Motley Fool UK has recommended Elementis. 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.