With inflation rising to 2.9%, dividend shares are becoming more important to many investors. After all, the yields available on a range of assets including cash, bonds and property are now negative in real terms in a variety of cases. As such, buying stocks which not only yield more than inflation today, but could do so even if inflation rises to above 3%, could be a worthwhile move. Here are two companies which could offer just that.
Positive update
Reporting on Wednesday was Isle of Man communications provider, Manx Telecom (LSE: MANX). The company released a pre-close trading update for the first six months of its financial year, with it performing in line with market expectations.
The company’s core domestic business of fixed line, broadband, data and mobile has performed relatively well and provides growth potential for the long run. Greater availability of high speed broadband means that Manx Telecom has seen its user base expand to 45% of the island’s population. Its mobile business has also enjoyed solid growth, with 4G capacity now at 99% of the island’s population.
Looking ahead, benefits are set to be realised from the transformation programme which was put in place in October 2016. This is aimed at improving competitiveness and the customer experience. Alongside improving levels of cash flow, this should put the company in a strong position to deliver improving profitability and rising dividends in future.
In terms of its income appeal, Manx Telecom currently yields 6% from a dividend which is covered 1.3 times by profit. This suggests that its income return is highly likely to beat inflation – even if the price level moves higher at a faster pace in the future. And since dividends are well covered by profit, they could rise at a brisk pace.
Growth potential
Also offering a high income return at the present time is McColl’s Retail Group (LSE: MCLS). The convenience store operator faces a somewhat uncertain future due in part to the rise of inflation. Consumer spending may come under pressure, since wage growth now lags price rises. This could cause a squeeze on pricing, leading to lower than expected profitability over the medium term.
Despite this, the company seems to offer investment potential. It trades on a price-to-earnings (P/E) ratio of 12.8 and yet is forecast to record a rise in its bottom line of 8% this year, followed by growth of 29% next year. This means it has a price-to-earnings growth (PEG) ratio of only 0.7, which suggests capital growth could be high.
The company’s dividend yield of 5% is expected to be covered twice next year by profit. This suggests dividend growth could be higher than profit growth without hurting the financial strength of the business. With a wide margin of safety and high income potential, McColl’s could be worth buying even though the outlook for the UK economy is uncertain.
