2 stocks with fantastic long-term dividend potential

Rapidly rising earnings are setting the stage for massive dividend increases for these two firms.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

At first glance income investors may take one look at the 2.54% yield shares of Howden Joinery (LSE: HWDN) offer and walk away but that would be a huge mistake.

Why? First off because the company’s true shareholder returns are more than double the headline 2.54% yielding dividend suggests. This is because the company supplements the annual dividend, which totalled £59m last year, with a share buyback programme that has returned £80m so far in fiscal year 2016 alone.

In addition, the kitchen maker has an amazing track record of growing earnings and dividends and with an ambitious expansion plan going well there’s plenty of room for future shareholder returns to continue growing.

Should you invest £1,000 in Pearson Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Pearson Plc made the list?

See the 6 stocks

 

2011

2015

Basic earnings per share (p)

13.5

27.3

Dividends per share (p)

0.5

9.9

Number of UK locations at year-end

509

619

Net cash at year end (£m)

57.1

226.1

This chart shows us that Howden has been growing sales per location at the same time as it added over 100 new depots in the UK. This is fuelling a huge rise in earnings and cash at hand, which has allowed an enviable rise in dividends while keeping shareholder payouts covered 2.75 times by earnings.

I reckon there’s plenty of potential for shareholder returns to continue growing rapidly as the company plans to expand to 800 depots in the next few years. This is a very achievable target and once it is met, management can decide to either invest retained earnings into growing the European business (which had just 24 locations as of Q3) or hugely increase dividends and share buybacks.

Either way investors are likely win in the long term. While Howden is a cyclical business, since it sells kitchens to builders, its net cash balance sheet and high margins due to a vertical supply chain are incredibly attractive. Add in shareholder returns totalling more than 5% a year, plus solid growth prospects, and I reckon income investors should give the company a closer look.

Long-term income potential worth paying for 

An ambitious expansion plan also has the potential to increase shareholder returns at discount retailer B&M (LSE: BME). At the end of Q3, the company had 533 stores in the UK and 73 in Germany with a medium term goal of 850 locations in the UK to be achieved by expanding outs of its core midlands and northern regions into the southeast of the country.

For now the company is using its growing earnings to fund expansion in both countries, which is why shares yield a miserly 1.68%. However, in the long term the rapid rollout of stores offers incredible potential for increased cash flow and eventually, for bumper shareholder returns.

This is down to new stores that pay for themselves within 15 months and are EBITDA-accretive within a year. Combined with sector-trouncing EBITDA margins of 9% B&M’s cash generation is very high with operating cash flow growing to £57.8m in H1 2017, even including expansionary capex.

Again, like Howden, once B&M hits its target of 850 UK stores, which at its current clip should be in five or six years, management may well decide to divert significantly increased cash flow to shareholder returns. Should this occur I reckon income investors will be very, very happy to own shares of this rapidly growing counter-cyclical business.

But is B&M the best income option out there?

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »