This 3%+ yielder is my top dividend growth pick

This 3%+ yielder offers tempting dividend growth prospects and attractive valuations.

| 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.

Motor insurance company Hastings Group (LSE: HSTG) is my top dividend growth pick because it offers promising earnings growth potential and attractive valuations.

Earnings potential

The company is showing strong business momentum following eight consecutive quarters of profitable growth since its IPO in October 2015. Market share is growing steadily, with recent figures showing a 14% year-on-year increase in live customer policies and a 25% increase in gross written premiums for the nine months to 30 September 2017.

Looking ahead, fundamentals are robust, with future growth underpinned by its recent big investments in reinforcing its digital advantage and favourable motor pricing tailwinds. City analysts offer upbeat earnings forecasts, with underlying earnings expected to rise by 47% this year and 16% in 2018.

Downside risks

Not everyone is convinced though. Analysts from Shore Capital reckon Hastings cannot escape the pressures from the UK Government’s recent change in the Ogden discount rate. And although the company’s recent claims experience has so far held up well, in the longer term, these rate reductions will likely result in reduced margins across the industry.

Other key risks include a less favourable motor pricing environment, the rising cost of claims and regulatory uncertainty.

Still, I reckon Hastings’s shares have already taken account of these downside risk factors. Valuations are undemanding, with shares in the company trading at just 12.7 times its expected earnings in 2018. Dividends currently yield 3.5%, but they’re forecast to grow by 28% this year, with a further increase of 21% in the following year.

Student property

Elsewhere, student accommodation developer Unite Group (LSE: UTG) also has tempting dividend growth prospects.

Earnings growth is underpinned by structural factors, such as the growing student population and the shift in preferences towards living in purpose-built student accommodation, and its attractive development pipeline.

With a deep pipeline of around 6,500 beds to add to its portfolio within the next three years, the real estate investment trust (REIT) has a very promising short-cycle portfolio of development projects. This is expected to add around 20% more beds to its current portfolio and significantly boost its recurring annual earnings per share.

Significant improvement

As a result of its expanding portfolio of completed developments, the company could see underlying EPS grow from 25p in 2016 to between 42p-46p by 2020. And with the company targeting a 75% dividend payout ratio, this would give us a prospective dividend yield of 4.1% in 2020. That’s a significant improvement on the current dividend yield of just 1.8%, with the dividends per share potentially more than doubling over the next three years.

On the downside, valuations are pricey with shares in Unite Group trading at a 20% premium to its net asset value (NAV). It wasn’t that long ago when Unite traded at a discount to its NAV — it most recently did so only back in September. As such, I would rather wait for a dip in its share price before buying into this stock.

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.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »