With the FTSE 100 experiencing a volatile period in recent months, dividend shares could offer a relatively impressive total return outlook. They provide an income in the near term which could help to contribute a sizeable part of total returns.
Furthermore, over the medium term, their dividend growth could signify to investors that they are performing well from a business perspective. This could increase demand for their shares and help to push their valuations higher.
With that in mind, here are two FTSE 100 shares which seem to offer sound income futures. Buying them now could be a shrewd move.
Having experienced a challenging period in 2013 when it recorded a pre-tax loss, insurance company RSA (LSE: RSA) has delivered a strong recovery. Under a refreshed management team and with a new strategy it has been able to not only return to having a black bottom line, but has also delivered three consecutive years of double-digit earnings growth.
In fact, in the last three years, its net profit has increased at an annualised rate of around 38%, which suggests that it has found a successful strategy. This has allowed it to raise dividends per share by 87% in the last two years, with further growth set to come.
RSA is expected to report a rise in shareholder payouts of over 30% per annum in the next two financial years. Its capacity to pay a higher dividend is set to improve, with its earnings due to increase by 15% this year and by a further 6% next year. Even with its strong growth in shareholder payouts, it is still due to have a dividend coverage ratio of 1.6 next year. This suggests that its 5.1% forward dividend yield is highly sustainable over the long run.
In the last year, the share price of water services company Severn Trent (LSE: SVT) has fallen by around 20%. Investor sentiment towards the stock and the wider utility sector has been weak, with uncertainty surrounding regulations being a key factor. Investors also appear to be in an increasingly bullish mood, which has reduced demand for defensive shares to some degree.
The company’s share price fall means that it now has a dividend yield of around 5%. This is historically high for the stock, and suggests that it may offer good value for money after its decline in valuation.
With Severn Trent expected to deliver earnings growth of 8% per annum over the next two financial years, a higher dividend seems to be very affordable. The company is due to record a rise in shareholder payouts of almost 11% per year in 2018 and 2019. Given that inflation is now below 3%, this could make the stock an appealing income play at a time when the FTSE 100 continues to be relatively volatile.
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Peter Stephens has no position in any of the shares 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.