While the FTSE 100’s dividend yield of 4.5% may be appealing, some shares offer a high yield as well as dividend growth potential. As such, over the long term they may be able to deliver a higher total return than the wider index.
One such company is GlaxoSmithKline (LSE: GSK). The pharma stock is making significant changes to its business model which could lead to a rising dividend over the long run. Alongside another dividend growth share which released a positive update on Thursday, it could be worth buying, in my opinion.
The stock in question is beverages company Britvic (LSE: BVIC). Trading in its first quarter was in line with expectations, with reported revenue rising by 4.5% to £352.4m. Organic constant currency revenue, excluding soft drink levies, increased 1.5% to £337.3m. The company remains on track to meet guidance for the full year and is optimistic about its future prospects, having plans to evolve the products in its current portfolio, making them more relevant to changing customer tastes.
Britvic has a solid track record of dividend growth. The company has increased shareholder payouts by 8% per year over the last four years. It now has a dividend yield of around 3.3%. Since dividends are covered twice by net profit, there seems to be considerable scope for them to rise at a continued fast pace over the medium term.
With the company trading on a price-to-earnings (P/E) ratio of around 15, it seems to offer good value for money, given its diverse range of brands and growth potential. As such, it may deliver impressive total returns over the long run.
As mentioned, GlaxoSmithKline is making a number of changes to its business. It’s moving away from a consumer healthcare focus after agreeing to the disposal of a number of brands. It’s also acquired oncology-focused biopharmaceutical company TESARO. This could strengthen its pharmaceutical business and may lead to a higher sales and profit growth rate in the long run.
Although dividend growth has been lacking in recent years, a changed management team and refreshed strategy could provide greater focus for the business. This may mean reduced diversification for investors, but could ultimately add more value as a result of efficiencies and a clearer growth strategy.
With GlaxoSmithKline’s financial performance less dependent on the outlook for the wider economy than is the case for many of its FTSE 100 peers, it may offer defensive appeal. Since the index has experienced a volatile period in recent months, the stock could become increasingly attractive to a range of investors. And with a dividend yield of 5.4%, as well as a P/E ratio of 12.7, it seems to offer a potent mix of income and value appeal over the long run. As such, now could be the right time to buy.
Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended Britvic and GlaxoSmithKline. 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.