With a dividend yield of 3.8%, the FTSE 100 appears to be a solid place to invest in order to obtain a relatively high income return. The current dividend yield is historically high and also suggests that the index may offer good value for money at its present-day price level.
However, it remains possible to obtain a higher yield in the long run. A number of stocks offer stronger dividend growth potential than the wider index, and could therefore become sound income plays over the coming years. And with investors likely to reward rapid dividend growth via a higher share price, they may also outperform the FTSE 100 when it comes to capital growth.
One stock which could offer superior income potential compared to the FTSE 100 is British American Tobacco (LSE: BATS). The company has experienced a challenging period, with its share price declining by 24% in the last year. Investors have become concerned about the prospects for the tobacco industry, with cigarette volumes continuing to fall. Although the company has been able to outperform many of its peers, cigarettes seem to becoming less popular among consumers.
However, growth potential could still be high in the long run. Many smokers are substituting cigarettes with next generation products, such as e-cigarettes. British American Tobacco expects to double revenue of those next-gen products to £1bn in the current year, and is investing heavily in the area as it anticipates impressive volume, sales and profit growth from the segment in future years.
With the stock having a dividend yield of 5.2%, while forecast to raise dividends per share by 7% next year, its income prospects appear to be sound. Moreover, a dividend that is covered 1.5 times by profit indicates that further dividend growth may beat market expectations in the long run.
Also offering the potential for rapid dividend growth is recruitment and training specialist Staffline (LSE: STAF). The company released a positive trading update on Wednesday which showed that its recruitment division has performed well despite a tight labour market. Acquisitions made so far in the current year have improved its long-term growth outlook, while its training, skills and well-being services division has continued to transition away from the Work Programme contracts.
Looking ahead, Staffline may face a difficult future due to the UK economy’s uncertain outlook. However, with a price-to-earnings (P/E) ratio of 9, it appears as though the market has priced in potential difficulties for the stock.
Dividends have grown from 10p per share in 2013 to 26.7p in 2016, which puts the company on a yield of 2.7%. With dividend payouts being covered 4.2 times by profit, there could be further strong growth ahead – especially since the company is forecast to deliver positive earnings growth in each of the next two financial years.
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Peter Stephens owns shares of British American Tobacco. 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.