Rising inflation means that dividend growth could matter more in future years. After all, a high yield is of limited use if its return on a real-terms basis is reduced each year by inflation. As such, shares in companies with fast-growing dividends could become increasingly popular. This could push their share prices higher. That’s why now could be the right time to buy these two stocks.
Improving performance
Reporting on Wednesday was plastic piping and ventilation systems manufacturer Polypipe (LSE: PLP). Its trading update showed it is on track to meet expectations for the full year, with revenue increasing by 6% versus the comparable period. This included growth of 4.8% in the UK, where continued strong organic growth is acting as a positive catalyst on the company’s financial performance.
Furthermore, Polypipe’s performance in Mainland Europe was also strong. It reported a rise in sales of 14%, with this falling to 4.2% when the effect of weaker sterling is excluded. It has seen an improvement in the operating environment within Europe, which suggests more growth could be ahead for the business.
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While Polypipe also announced a change to its CEO today, with the CFO set to take over, the company’s strategy looks set to deliver rising earnings and dividends over the medium term. For example, in the current year the company is expected to record a rise in its bottom line of 7%, followed by further growth of 9% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of only 1.5, which indicates upside potential may be high.
While a dividend yield of 2.4% may be relatively modest, dividend cover of 2.5 suggests a higher dividend could be ahead for the company. In fact, dividends are due to rise by 7.5% per annum during the next two years, which means Polypipe could become a strong income play.
Growth potential
Also offering scope for a higher dividend over the medium term is cellular material technology company Zotefoams (LSE: ZTF). As with Polypipe, it currently has a relatively low dividend yield of 1.9%. However, since dividends are covered 2.3 times by profit, there is clear growth potential when it comes to shareholder payouts. In 2017 and in 2018, for example, the company’s dividends are expected to rise by 4% and 5% respectively. This is likely to be well ahead of inflation.
As well as the chance to become an increasingly attractive income share, Zotefoams also offers capital growth potential. The company’s business model and strategy seem to be sound, since it has been able to grow earnings in each of the last three years. Looking ahead to the next two years, it is expected to record a rise in its bottom line of 15% and 17% respectively. This puts its shares on a PEG ratio of just 0.9, which indicates there could be significant upside potential on offer over the long run.
