Higher inflation is already causing greater challenges for income investors. It is now 2.9% and means a number of FTSE 250 companies now offer negative real dividend yields. The index itself yields 2.6%, which would lead to a loss of spending power for investors seeking to rely upon their investment for income purposes.
However, within the index there are still some shares which offer positive real income yields. Here are two prime examples which also offer strong dividend growth potential over the long run.
Uncertain future?
Reporting on Wednesday was housebuilder Bellway (LSE: BWY). It has a relatively uncertain future due to the instability of the UK government. Although it now seems likely that the Conservatives will be in power with a minority government, history tells us that this can lead to weak government. This may not bode well for the performance of the wider UK economy, which could mean confidence surrounding major purchases such as houses comes under pressure.
Despite this risk, the outlook for Bellway and the wider industry is relatively positive. Low supply and high demand for houses have combined to push the company’s sales up by 13% in the February to June period. Housing completions for the full year are expected to increase by 10%, while the operating margin has remained steady at 22%.
In terms of its income potential, Bellway’s yield of 3.8% is comfortably ahead of inflation. Therefore, it seems likely it will stay that way over the medium term. Dividend growth potential remains high partly as a result of the company’s dividend payout ratio of just 33%. This could rise and still leave the business with sufficient capital to reinvest for future growth. Trading on a price-to-earnings (P/E) ratio of just 8.7, now could be the perfect time to buy it due to a wide margin of safety.
Dividend growth potential
Also offering upbeat dividend growth prospects is healthcare real estate investment trust (REIT) Assura (LSE: AGR). It has been able to raise shareholder payouts by over 100% during the last four years, which puts it on a dividend yield of 3.5%. While only 60 basis points ahead of inflation, dividend growth of 7.5% per annum is forecast over the next two years. This should ensure it remains a favourable place to invest even if inflation heads north of 3%.
As with Bellway, Assura also faces an uncertain future. Its focus on the UK economy means it could experience some challenges in the medium term as Brexit gradually becomes a reality. However, since it operates in a relatively defensive sector, it may offer a degree of protection against volatility in the wider FTSE 250. Its price-to-book (P/B) ratio of 1.3 also suggests that it offers a relatively wide margin of safety at the present time. Therefore, it could deliver share price growth even after its 13% gain since the start of the year.