3 stocks I’m tipping for dividend growth in 2017

Edward Sheldon looks at three stocks that he believes will increase their dividend payouts in 2017.

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I’m a huge fan of dividend growth investing as it’s an investment strategy that really allows you to put the power of compounding to work. With that in mind, here are three companies I’m tipping to increase their dividend payouts in 2017.

Legal & General Group

Insurance giant Legal & General Group (LSE: LGEN) currently sports one of the more sizeable yields in the FTSE 100 after paying out a generous 13.4p per share in dividends for FY2015. While this 5.6% dividend yield is approaching a level at which some investors may start to question its sustainability, I’m not fazed and I’m backing the insurer to increase its dividend in 2017.

The dividend coverage ratio is a useful one when it comes to assessing dividend sustainability. This ratio is calculated by dividing earnings per share by dividends per share and investors see a level of above 1.5 as being healthy. Legal & General’s coverage ratio currently stands at 1.39, which is a little on the low side, but certainly not a level to panic about.

Legal & General has boosted its dividend payouts by 19%, 21% and 22% over the last three financial years and city analysts expect the dividend growth to continue in FY2016, with a 7% rise forecast. While a hike of 7% may not be as prolific as the recent increases, it’s still a level comfortably above inflation and a nice little boost to your dividend cheque.

The stock is a favourite of prominent fund manager Neil Woodford, and with the valuation looking very reasonable on a forward looking P/E ratio of just 11.4, Legal & General looks to be a solid dividend growth stock for 2017 in my opinion.

DS Smith  

DS Smith’s (LSE: SMDS) yield of 3.15% may not be the largest in the FTSE 100, but it’s well-covered and the company’s recent dividend growth is impressive with increases of 12%, 14% and 25% over the last three financial years. City analysts have pencilled-in dividend growth of 10% for FY2017, meaning that the forward-looking yield now stands at a healthy 3.5%.

Recent half-year results were strong, with the company reporting revenue growth of 21% and an adjusted operating profit increase of 23%, or 9% at constant currency. Yet the stock can be bought on an undemanding P/E ratio of just 12.9 times next year’s forecast earnings and for this reason, I believe DS Smith offers the potential for capital growth and dividend growth in 2017.

Imperial Brands

Lastly, I reckon tobacco giant Imperial Brands (LSE: IMB) is a standout dividend growth stock at its current share price and I’m confident the company will lift its dividend payout in 2017. Imperial has increased its dividend by 10% for an impressive eight consecutive years and recently stated in its FY2016 results that it remains “committed to this level of increase over the medium term.

A 15% share price correction since mid-August provides an attractive entry point in my opinion, as the company’s yield has increased from 3.7% back in August to a healthy 4.4% now. And with a 10% dividend increase set to take the yield to 4.9% next year, Imperial Brands is a stock I’m tipping to do well in 2017.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Legal & General Group, DS Smith and Imperial Brands. The Motley Fool UK has recommended DS Smith and Imperial Brands. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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