While many income investors may naturally focus on the dividend yield offered by stocks when considering their purchase, companies that offer lower yields and impressive dividend growth could be worthy of consideration.
They may not only offer an increasingly appealing income return, but a rising dividend may suggest they are performing well from a business perspective. In the long run, this could lead to a rising share price.
With that in mind, here are two FTSE 100 shares that may not have high yields at present, but could produce improving income outlooks over the next few years.
Bunzl (LON:BNZL) Support services company Bunzl (LSE: BNZL) has a solid track record of dividend growth. In fact, over the last four years, the company’s dividends per share have increased from 35p to 50p. This equates to an annualised growth rate of over 9%.
Despite such a strong rate of growth, however, the company’s dividends are covered 2.6 times by profit. This suggests they could rise at a faster pace than profit growth over the medium term without hurting the financial strength of the business.
Bunzl’s acquisition-focused business model has proved to be highly successful. The company appears to have the financial firepower to engage in further acquisitions should they become available. As such, its medium-term growth outlook appears to be appealing.
Although the stock has a dividend yield of only 2.5%, its potential to raise dividends at a rapid rate over the coming years could mean it offers an improving income investing outlook. As such, now could be the right time to buy a slice of it.
Pearson Education specialist Pearson (LSE: PSON (LON:PSON)) has endured a difficult period in recent years, with its financial performance coming under severe pressure. In response, it’s put in place a revised strategy that appears to be working well.
In the current year, for example, the business is forecast to post a rise in earnings of 13%. With its share price performance having been mixed over the last six months, it trades on a price-to-earnings growth (PEG) ratio of 1.6, which suggests it may be undervalued.
Clearly, a period of change and investment for the business may mean dividend growth is more limited than it otherwise would be. Despite this, it’s due to post a rise in dividends per share of 9% in the current year. And, with dividends expected to be covered 2.8 times by profit in 2019, there seems to be significant scope to raise them at a rapid rate over the medium term.
Although Pearson may lack the defensive appeal other FTSE 100 dividend stocks provide, the company’s dividend growth potential could allow it to outperform many of its index peers on a total return basis. While its 2.5% dividend yield may be relatively low, its income returns could rise quickly as it implements its strategy.
Peter Stephens has no position in any of the 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.
Motley Fool UK 2019