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Why I’m considering these dividend growth stocks for my ISA

When it comes to looking for dividend stocks for my Stocks and Shares ISA, I’m looking for a particular class of companies. I want businesses that have both an attractive level of income to start with, and the potential to grow their dividends steadily over time.

One stock that has recently cropped up on my radar is pawnbroker H&T Group (LSE: HAT). Ethical considerations aside, over the past five years, this company has proven to be a fantastic investment. Earnings per share have more than doubled as net profit has increased from £5.4m to £10.8m for 2018.

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And as profits have increased, management has hiked the company’s dividend payout. The per share distribution has risen from 4.8p in 2014, to 11p for 2018. It looks as if there is still plenty of room for the dividend to grow from here.

Dividend cover — the ratio of earnings per share compared to dividend per share — was 2.7 times in 2018 and is expected to hit 2.9 for 2019. Overall, analysts have pencilled in earnings per share growth of 13% for this year. 

Growth on track

It looks as if the firm is well on the way to meeting this target. H&T’s half-year results reported a 7.9% increase in profit before tax for the first half of the year with operating profit before non-recurring expenses rising 16%. 

With profits up by a high single-digit percentage for the first half of the year, management has decided to increase the interim dividend payout by nearly 7% to 4.7p. Analysts were only expecting growth of 4.6% for the full year. So, it looks as if H&T’s dividend might grow faster than expected in 2019.

This is precisely what I’m looking for in a dividend investment. With a dividend yield of 3.4% at the time of writing, H&T ticks all the boxes on my dividend stocks checklist. That’s why I’m considering it for my Stocks and Shares ISAs today.

Time to buy?

I’m also going to be taking a closer look at the accident management assistance group Redde (LSE: REDD). Shares in this company have been a pretty poor investment in 2019. The stock is down around 56% year-to-date after management revealed that the business was not successful in securing the renewal of a hire and repair contract with a large insurer. This contract had been worth nearly £112m a year to the business.

The loss of the contract will effectively wipe out 10% of Redde’s bottom line. Nevertheless, management is confident that the company can replace this business relatively quickly, considering the scale of the group’s pipeline. Indeed, since 2014, Redde’s sales have increased by more than 160%. 

Considering the company’s track record of growth, I think the recent decline could be an excellent opportunity to snap up shares in this well-run business at an attractive price. 

The stock is currently dealing at a forward P/E of just 8.1 and, more importantly, supports a dividend yield of 10.6%. While there may not be much in the way of dividend growth to look forward to in the next few years as Redde tries to replace the lost business, I think there is a good chance dividend growth will return when the company’s sales start to pick up again. 

With this being the case, I’m looking to add the stock to my portfolio shortly.

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Rupert Hargreaves owns no share mentioned. 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.