With Prudential (LSE: PRU) currently yielding 3.3%, it may be deemed too low for purchase by some income investors. After all, the FTSE 100 has a yield of just under 4% at the moment, so Prudential’s yield is relatively unappealing.
However, Prudential has the scope to increase dividends per share at a rapid rate in future years for two main reasons. Firstly, it has a rather low payout ratio. It currently pays out just 37% of profit as a dividend, which for a mature and stable business seems to be low. Even if Prudential were to instantly double dividends it would still equate to a payout ratio of around 74% and leave it with sufficient profit left over through which to reinvest for future growth.
Secondly, Prudential has superb long-term earnings growth potential. Financial product penetration in Asia remains relatively low and the company is well-placed to benefit from its position as a diversified financial services business moving forward. And with Prudential’s bottom line expected to rise by 9% this year and by a further 8% next year, high levels of dividend growth could be just around the corner.
Overlooked income star?
Also often overlooked for its income appeal is M&S (LSE: MKS). It’s often viewed as a relatively safe retail option that offers a degree of turnaround potential as it seeks to reorganise its supply chain, product offering and online presence. However, M&S also offers a yield of 4.9% and with upbeat dividend growth on the horizon, it could prove to be an exceptional income play.
For example, M&S is forecast to increase shareholder payouts by 7.2% in the next financial year, then by a further 8.1% in the following year. This is possible due to the company’s improving financial performance. Its bottom line is set to benefit from changes made to the business, as well as a growing UK economy, to deliver a rise in earnings of 6% next year and 8% the year after.
Although shares in M&S have disappointed in the last year, being down by 16%, they now offer excellent value for money. For example, they have a price-to-earnings (P/E) ratio of just 11.4, which indicates that upward rerating potential is on the cards.
Huge potential
Meanwhile, AstraZeneca (LSE: AZN) is another company that may offer better income prospects than the market is anticipating. Certainly, AstraZeneca’s bottom line continues to come under pressure from the loss of patents on key blockbuster drugs and as a result, dividend payments have flatlined in recent years. However, it still offers a high yield and long-term growth potential.
In fact, AstraZeneca yields a hugely enticing 4.8% at the present time and with its drug pipeline improving due to the company’s ambitious M&A activity of recent years, its profitability is set to rapidly improve in the coming years. With AstraZeneca’s dividend being covered 1.4 times by profit, it continues to offer a relatively robust dividend as well as the scope for rising shareholder payouts.
