When it comes to dividend investing, many people will happily stick with the perceived safety of defensive sectors such as utilities and pharmaceuticals within the top-tier FTSE 100 index, and I for one don’t blame them. Why would risk-averse investors choose to venture further than the blue chip index at the expense of higher risk and volatility when all they want is steady reliable income from their hard-earned savings?
Wild, Wild West
But of course not everyone is content with 3% to 5% returns each year, some are willing to take higher levels of risk with their capital if it means there’s potential for far greater returns in the form of significant share price appreciation. The hunting ground for those types of growth investments would normally be within higher risk sectors such as Oil & Gas or Mining, or perhaps from within the Wild West landscape of the Alternative Investment Market (AIM).
But there’s another way. It’s very possible to achieve both reliable dividend income and the prospect of significant capital gains if you’re willing to hunt down firms with a good track record of both earnings and dividend growth. You’ll be surprised how many overlooked dividend stars are waiting to be discovered for those willing to take on a slightly higher level of risk and venture further than the comfort of the FTSE 100.
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Progressive dividend
One such firm is integrated utilities provider Telecom Plus (LSE: TEP). Despite its name, the FTSE 250 firm that owns the more familiar Utility Warehouse brand provides homes and small businesses with landline, mobile, broadband, gas and electricity services. There are also plans in the pipeline for car, home and boiler insurance as well as water supply. The company isn’t resting on its laurels, that’s for sure.
In its most recent update, the group noted that the gap in the market between standard tariffs and introductory fixed-term energy deals had started to narrow, and prices had started to rise. In my view this could lead to a recovery in the competitiveness of its multi-utility proposition, with a return to faster organic growth.
City analysts expect the company to continue with steady earnings growth over the medium term, with further increases to the already generous dividend payout, which currently translates to a 4.2% yield for the year ending 31 March. I think Telecom Plus offers investors the perfect balance between capital growth and progressive dividend income.
4% sweetener
Another mid-cap firm that’s currently offering an attractive balance of growth and income is food processing giant Tate & Lyle (LSE: TATE). Once famous for its sugar refining business, the group is now a global provider of distinctive, high quality ingredients and solutions to the food, beverage and other industries.
Management now expects full-year profits to be higher than first thought after a strong performance in the first half of its financial year driven by a combination of favourable currency movements and organic growth. With revenues likely to reach £2.7bn this year and pre-tax profits forecast to double to £254m, I believe Tate & Lyle should continue to please shareholders with capital growth and a rising dividend, which currently yields a solid 4% for FY2017.
