While a big dividend yield may make a stock more appealing from an income investing perspective, it should not be the only consideration when buying income stocks. After all, a high yield that fails to rise over the long run can eventually become relatively unimpressive.
With that in mind, here are two FTSE 100 stocks that may not have the highest yields in the index at the present time, but that could offer rapidly-rising dividends in the long run. As such, now could be the right time to buy them.
Unilever (LSE: ULVR) continues to offer an impressive long-term growth outlook. Certainly, there are continued concerns about the strength of China’s retail sales prospects – especially at a time when fears surrounding a global trade war are exacerbated. However, with the stock having a diverse geographic spread, it may be able to overcome risks in some regions by delivering growth elsewhere.
In terms of its dividend yield, Unilever currently offers an income return of 3.1%. That’s around 1.2% lower than the FTSE 100’s yield, which may lead to some investors being lukewarm about its income investing prospects. However, the company has a strong track record of dividend growth.
In the last three years, for example, dividends per share have risen at an annualised rate of over 15%. Since dividend payouts are currently covered 1.6 times by profit, there could be scope for further dividend increases in the long run.
Although Unilever’s price-to-earnings (P/E) ratio of 20.7 is relatively high, it has been significantly higher in the past. Therefore, the stock could offer improving total return potential, as well as lower risk due to its diverse range of products and geographic exposure.
Although there are continued fears about the prospects for the US housing market, plumbing business Ferguson (LSE: FERG) continues to have a bright financial outlook. In the current year, for example, the company is expected to post a rise in earnings of 21%. This puts it on a price-to-earnings growth (PEG) ratio of just 0.8, which suggests that it could deliver impressive capital growth in the long run.
Ferguson’s income investing prospects may also be highly appealing. The company currently has a dividend yield of just 2.6%, but this is covered 2.8 times by profit. This suggests that there could be a rapid rate of dividend growth in the coming years that would not put the company in a difficult financial position. Since dividends per share have increased at an annualised rate of 14.6% during the last four years, the company has a good track record of raising shareholder payouts.
Therefore, while Ferguson may lack a high income return today, its dividend growth prospects could make it an enticing income stock in the long run. With capital growth potential also on offer, its total returns could be highly impressive.
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Peter Stephens owns shares of Unilever. The Motley Fool UK owns shares of and has recommended Unilever. 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.