2 growth dividend stocks at the top of my buy list

Double-digit earnings growth and dividend yields above 3% have these stocks on my radar.

| 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.

Most investors know and understandably love companies such as Rightmove or Auto Trader that offer high growth, astronomical margins and plenty of potential for stellar returns in the long run. But these aren’t the only two companies fulfilling these criteria.

Boring but dependable 

One big growth dividend stock that offers all these characteristics is self-storage business Big Yellow Group (LSE: BYG). Its growth credentials are solid, having increased sales and earnings per share every year since going public in 2008 on the back of expansion across the UK and strong occupancy rates as a generation of renters find themselves with too many objects and not enough space to store them at home.

The beauty of running a self-storage business is that as long as occupancy rates remain high, and they were a very good 75.5% in Q3, operating margins are impressive as each location requires very few employees and running costs are incredibly low. Indeed, in the first half of the financial year EBITDA margins were 67% and the business kicked off £28.9m in operating cash flow on £54.8m in revenue.

Now, free cash flow, which accounts for capital expenditure, was significantly lower in the period as £21m was spent on purchasing four new sites to expand the estate to 73 stores. But for dividend investors this shouldn’t be much of a worry as the company’s REIT status and healthy balance sheet meant management still increased interim dividend payments by 11.5%.

Analysts are forecasting a similar rise in full-year dividends and are predicting a payout of around 27.57p per share this time. This would work out to a very healthy 3.4% yield that is well covered by growing earnings and would mark the seventh consecutive year of dividend increases.

The downside is that the company’s shares are much loved by investors and trade at a premium valuation of 22 times forward earnings. Although the business has good cash flow, solid growth prospects and a hefty dividend yield, I’ll be waiting for a more sane valuation before jumping in and buying its shares.

One word: plastics 

Another highly cash generative, growing business that is paying out a very nice dividend is plastics manufacturer Victrex (LSE: VCT). The company’s high tech plastics have been a hit with smartphone makers, aeroplane manufacturers and automakers seeking to trim weight and improve durability.

The popularity of these efficiency gains is clear in the results for the six months to March, in which revenue rose 12% year-on-year to £130.9m. A unique product and high barriers to entry for competitors mean plenty of pricing power, with healthy operating margins of 38% in the half and an increase in net cash to £86m at period end.

This level of cash is an important milestone as it clears the £85m threshold at which management will consider a special dividend of at least 50p per share. Last year the company paid out a normal dividend of 46.82p per share for a yield 3%. So if full-year dividends rise in line with interim payouts and a special dividend is awarded, shareholder could be looking at a yield of around 5.8% at the current share price.

With very impressive growth prospects, good margins, bumper shareholder returns likely and a reasonable valuation of 19 times forward earnings, now may be a good time to take a closer look at Victrex.

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 Auto Trader, Rightmove, and Victrex. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »