With interest rates set to remain at relatively low levels over the coming years in a period of continued monetary policy tightening, buying dividend shares could be a shrewd move. Other assets may gradually become more appealing on an absolute basis, but they may fail to outperform shares when it comes to income returns.
Reporting on Thursday was a FTSE 250 dividend growth stock which seems to offer a strong income future. However, it may not be the most appealing dividend play in the mid-cap index at the present time.
Solid performance
Releasing a first quarter trading update on Thursday was aqueous polymer specialist Synthomer (LSE: SYNT). Trading during the period has been relatively consistent, with its Europe and North America segment delivering higher volumes than in the comparative period. This was largely due to the positive impact of the Speciality Additives and Pischelsdorf SBR latex acquisitions.
Similarly, the company’s performance in Asia and the Rest of World segment was in line with expectations. Nitrile latex volumes were marginally higher than in the weaker comparative period when customer spending was hurt by a volatile raw material environment. This has helped the business to remain on track to meet its guidance for the full year.
With Synthomer forecast to deliver earnings growth of 5% in the current year and a further 10% next year, it seems to be performing well. This should enable it to raise dividends per share by around 7% per annum during the next two years, which puts it on a forward dividend yield of 2.8%. Since dividends are covered 2.5 times by profit, they could rise rapidly over the medium term and improve the company’s income outlook.
Low valuation
While Synthomer appears to offer an upbeat dividend future, fellow FTSE 250-listed company Crest Nicholson (LSE: CRST) could offer an even more compelling income investment outlook. The housebuilder has a dividend yield of over 7% at the present time, with further dividend growth forecast over the next two years.
The company is expected to report a rise in earnings of 6% this year, followed by additional growth of 12% in the 2019 financial year. These figures should enable dividend growth of over 10% per annum during the same time period, which could lead to a dividend yield of over 8% next year.
Clearly, the housebuilding sector faces an uncertain future and Crest Nicholson’s share price could prove to be highly volatile. However, with the company’s dividend being covered twice by profit and it trading on a price-to-earnings (P/E) ratio of around 8, it seems to offer a wide margin of safety.
Therefore, for long-term income investors who are comfortable with the potential for above-average volatility in the short term, it could prove to be a sound risk/reward opportunity at the present time. Its low valuation plus high dividend growth prospects could mean it is able to justify a higher share price in future years.
