Finding companies with solid yields and rapidly-growing dividends may become more difficult during the course of 2017. Inflation is already at 2.3% and is expected to move higher. When combined with the uncertain economic outlook facing the UK, this means higher-yielding shares could become increasingly in demand. Furthermore, dividend growth may suffer if economic growth stalls. Despite this outlook, now could be the perfect time to buy these two income stocks.
Growth potential
While the outlook for the building supplies sector is somewhat uncertain, Michelmersh (LSE: MBH) appears to offer a sound investment case. The manufacturer of bricks and supplier of building materials seems to have significant scope to increase dividends at a rapid pace. A key reason for this is the fact that dividends are covered almost twice by profit. While a portion of profit needs to be reinvested in the company for future growth, a higher dividend payout ratio could be ahead following the quadrupling of shareholder payouts in the last two years.
In the long run, the building supplies industry is likely to deliver relatively impressive growth. Although the UK economic outlook may be somewhat uncertain, demand for housing remains high. And with population growth likely, as well as a lack of supply of housing, the industry appears to have a relatively healthy long-term outlook.
Although Michelmersh currently yields just 3.1%, its dividend growth prospects could help to push its share price higher. Since it trades on a price-to-earnings (P/E) ratio of 14.8 versus a historic average of 24.9 in the last five years, there seems to be upside potential on offer over the medium term.
Dirt-cheap income play
While Michelmersh may have a P/E ratio that is higher than many of its sector peers, fellow building supplies company Forterra (LSE: FORT) has a rating of only 8.6. This indicates that there is substantial upward re-rating potential on offer, which could indicate the company also faces a difficult future.
However, this does not seem to be the case. Although the wider industry faces a degree of uncertainty, Forterra is forecast to record a rise in its bottom line of 7% in the current year and a further increase in earnings of 9% next year. This shows that the company’s current strategy is working well. It also means that Forterra trades on a price-to-earnings growth (PEG) ratio of around one, which suggests its above-average growth is available at a very reasonable price.
In terms of dividends, the company has a yield of 4.5%. This is around 80 basis points higher than the FTSE 100’s yield. Since Forterra’s dividend is covered 2.6 times by profit, there is scope for it to rise significantly and remain sustainable. In fact, it could easily increase at a double-digit rate over the next couple of years without putting the business under pressure. This could lead to improved investor sentiment and a higher share price.