While a high yield can help to boost the income return from a portfolio, the rate of dividend growth can also be of equal importance. That’s simply because, over time, a mediocre dividend can become a hugely appealing one if the company in question is able to rapidly increase the amount it pays out to its investors. And with dividend growth also having the potential to act as a positive catalyst on investor sentiment through showing the company is confident regarding its long-term outlook, it can lead to higher capital gains too.
One company in the process of rapidly increasing dividends per share is Morrisons (LSE: MRW). Although it has slashed dividends in recent years as a result of intense competition within the supermarket industry, it’s set to record rapid increases in shareholder payouts as its prospects improve.
Evidence of the company’s improving performance is clear in today’s results, with Morrisons having achieved its initial aims of stabilising like-for-like (LFL) sales and reducing costs in 2015. And with the company posting positive LFL sales in the final quarter of the year despite food price deflation of over 3%, its strategy of improving customer satisfaction and focusing on its core activities seems to be yielding impressive results. Furthermore, with Morrisons generating free cash flow of £1.6bn over the last two years, it is ahead of expectations on this front and this bodes well for future dividend growth.
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On this topic, dividends are forecast to rise by 15.5% over the next two years as Morrisons is expected to post an increase in earnings of 32%. This may put it on a forward yield of just 3%, which is a quarter lower than the FTSE 100’s yield. But with dividends due to be well-covered by profit, there’s tremendous scope for further rises. And with Morrisons likely to further benefit from a new strategy and an improving UK economy, prospects for income-seekers seem to be bright.
Building for growth
Also increasing dividends at a fast pace is housebuilder Persimmon (LSE: PSN). Unlike Morrisons, Persimmon is already a relatively high-yielding stock since it currently offers a yield of 5.5% due to its new plan for capital returns. This states that the company will pay out 110p per share (5.5% at current prices) every year all the way through to 2021.
While impressive, there’s scope for Persimmon to make the plan even more generous. It has already done so once in response to better-than-expected profitability, and with interest rates likely to remain low and the UK economy performing well there appears to be a good chance of further increases in payouts over the coming years.
That’s especially the case since Persimmon is due to cover dividend payments 1.7 times next year. This indicates that it could become more generous with shareholder payouts while maintaining its resilient financial position.
Price rise ahead?
Meanwhile, insurance company Esure (LSE: ESUR) is another stock that has excellent income prospects. For example, it currently yields 5.5% and with dividends due to rise by 12.5% next year, the company could be yielding as much as 6.2% in 2017. This means it offers an income return of almost 12% during the next two years.
A key reason for Esure’s upbeat dividend growth prospects is its forecast growth rate of earnings. The company’s bottom line is expected to rise by 15% this year and then by a further 16% next year. As such, a 12.5% rise in dividends appears to be very affordable and rather prudent, while Esure’s price-to-earnings growth (PEG) ratio of 0.8 indicates that its shares could be set to rise following their 11% increase in the last year.
