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Two great FTSE 250 income stocks that could double their dividends

While dividend growth at the top end of the market has been subdued in recent years (companies such as Royal Dutch Shell, GSK and HSBC haven’t raised their payouts in years) there are plenty of mid-sized companies in the UK that are lifting their dividends at a healthy rate. They also have the financial firepower to keep increasing their payouts in the future. 

Here’s a look at two FTSE 250 stocks that I believe could double their dividends in the coming years.

OneSavings Bank

Investors love it when a company lifts its dividend significantly and one that’s doing exactly that is challenger bank OneSavings Bank (LSE: OSB). Since its 2014 IPO, the company has paid divis of 3.9p, 8.7p, 10.5p and 12.8p per share, meaning that the group has lifted its payout by 228% in the space of just three years. Can the dividend growth continue?

The bank released half-year numbers yesterday and, for income investors, there was more good news. Thanks to net loan book growth of 11% and a 17% increase in profit before tax for the half year, the group decided to lift its interim dividend by another 23% to 4.3p per share. Looking ahead, analysts expect a payout of 14.6p per share for the full year, which translates to a prospective yield of 3.4% at the current share price.

One thing I really like about OSB’s dividend prospects is the amount of dividend coverage the bank has. Earnings per share this year are forecast to come in at 53.3p per share, which would provide dividend coverage of a very healthy 3.7 times on the estimated payout of 14.6p. In other words, profits could halve here and the dividend would still look sustainable.

Of course, as a UK bank that focuses on the buy-to-let market, there are risks to the investment case. For example, yesterday’s results showed an increase in the bank’s loan loss ratio as growth in property values slowed. Yet overall, OSB appears to have momentum at present, and I envisage further dividend growth from the bank in the coming years.

Bellway

Housebuilder Bellway (LSE: BWY) is another company that appears to have strong dividend prospects and the potential to double its payout in coming years. The group has registered some of the highest dividend growth across the entire FTSE 350 index in the recent past, and has paid out 52p, 77p, 108p and 122p per share between FY2014 and FY2017. That represents a compound annual growth rate (CAGR) of an incredible 33%.

Bellway looks well placed to keep rewarding investors with big dividends, in my view. In a recent trading update, the group announced that it had just built 10,000 homes in a year for the first time in its 70-year history and that revenue for the period was up around 16%. As such, City analysts are expecting the group to lift its dividend by another 13.2% to 138.1p per share (a prospective yield of 4.7%) when it reports full-year results on 16 October.

Like OneSavings Bank, Bellway has a high level of dividend coverage, with analysts expecting earnings to cover this year’s payout approximately three times. While it’s worth keeping in mind that housebuilding is cyclical and that dividends could dry up if the UK’s housing market crashed, I think Bellway’s dividend has plenty of room for future growth given current market dynamics.

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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings. 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.