In the current year, technology company ARM (LSE: ARM) is forecast to increase its dividend per share by 18.7%. That’s a rapid rate of growth and the company is due to follow this up next year with a further increase of 21.7%.
Such a high rate of growth is, of course, understandable. That’s because ARM is becoming a more mature business and, as a consequence needs to reinvest a lower proportion of profit for future growth opportunities. This means that shareholder payouts are set to increase as a percentage of net profit over the medium to long term, having risen from 31% to 38% in the last four years.
However, the major driver of ARM’s increasing dividends in the short term is its bottom line growth prospects. With smartphone sales still booming on a global level, ARM’s net profit is forecast to rise by 66% in the current year and by a further 14% next year.
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Despite this, ARM still offers a forward yield of only 1%. That may be higher than the current rate of inflation but, realistically, is unlikely to appeal to income-seeking investors at the present time.
That’s because there are a whole host of stocks that offer considerably higher yields, with the likes of Royal Mail (LSE: RMG), Pennon (LSE: PNN) and Berkeley (LSE: BKG) being notable examples.
In the case of Pennon, the water services company currently offers a yield of 4.2% and, with dividends expected to rise by 4.4% next year, it appears to be a very appealing income stock. Furthermore, it offers relatively low risk due to the stability which is present in the water services market. While liberalisation of the sector is due to go ahead in 2017, the reality is that the major players are likely to dominate and, with Pennon’s net profit forecast to rise by 12% next year, it appears to be in a strong position to raise dividends further over the medium term.
Similarly, house builder Berkeley is a star income stock. It is committed to returning 28% of the company’s current share price as dividends between now and September 2021, with any surplus capital also being used to either reinvest for future growth or increase shareholder payouts (including share buybacks). And, with the prospects for the UK property market being relatively bright as interest rates are set to remain low, Berkeley could continue to grow its bottom line at a rapid rate following the 34% annualised growth rate of the last five years.
Meanwhile, Royal Mail currently yields 5% and, while its profitability is coming under pressure due to increasing competition within the parcel delivery sector, its dividend coverage ratio stands at a very healthy 1.46. This indicates that, even if profits fall, shareholder payouts should continue to be paid out at their present level. In addition, with Royal Mail trading on a price to earnings (P/E) ratio of just 13.9, it seems to offer good value for money and could be the subject of an upward re-rating over the medium to long term.
So while ARM’s dividend is rising at a rapid rate, the likes of Royal Mail, Berkeley and Pennon offer much better income prospects and are worth buying first for investors seeking top notch dividend prospects.
