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How Barclays’ high yield could help you become a stock market millionaire

While Barclays (LSE: BARC) has a dividend yield of just 1.5% at the present time, its dividend growth potential appears to be exceptionally high. In fact, over the next two years, the bank is forecast to grow dividends per share from 3p to 8.2p. This puts it on a forward dividend yield of 4.2% for 2019, with further dividend growth anticipated thereafter.

As such, now could be the perfect time to buy it. Alongside another dividend stock, which reported a positive update on Wednesday, it could boost your portfolio returns over the medium term.

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A changing business

The main reason for the expected increase in Barclays’ dividend over the next couple of years is the progress of its strategy. Under its present CEO, the company has sought to improve its financial strength and the efficiency of its business model. In order to achieve this as quickly as possible, it placed less emphasis on dividends, which meant that they were cut from 6.5p per share in 2015, to 3p per share in 2016.

At the time, many investors were unhappy about the cut. However, after asset disposals and a focus on efficiency, the company appears to be in a stronger position to generate earnings growth over the medium term. In fact, its bottom line is forecast to rise by 15% in the next financial year, which is expected to catalyse dividend growth.

With Barclays’ dividend coverage ratio expected to be 2.8 in the 2019 financial year, further dividend growth could be ahead in 2020 and beyond. In fact, if the company reduced its coverage ratio to 1.75, it could yield as much as 6.6% at its current price level. As a result, now could be the perfect time to buy the stock ahead of what may prove to be a strong period for dividend growth.

Solid growth

While Barclays has delivered a ‘rollercoaster ride’ when it comes to dividends, housing support services company Mears (LSE: MER) has posted robust dividend growth in recent years. The company’s shareholder payouts have risen in each of the last four years, increasing on an annualised basis by 8%.

Looking ahead, the company’s dividend growth prospects appear to be bright. Its pre-close trading update released on Wednesday showed that it’s making solid progress in core divisions. Its pipeline of opportunities remains enticing, while its strategic evolution as a business could mean that it’s able to access growth opportunities that were previously unavailable.

With Mears forecast to grow its dividends by 12% per annum over the next two years, the company has an attractive forward yield of around 4.7%. Given the fact that its dividends are covered 2.4 times by profit and as it’s expected to report positive earnings growth over the next two years, income investing prospects appear to be bright.

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Peter Stephens owns shares of 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.

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