Dividend growth investing is a popular strategy that has many benefits. As a company raises its dividend over time, it tends to enjoy a rise in its share price, meaning that as an investor, you can potentially benefit from the powerful combination of rising dividends and capital gains.
The small-cap area of the market shouldn't be ignored when hunting for dividend growth stocks. There are some fantastic under-the-radar investment opportunities available outside the FTSE 100. Here's a look at two stocks I rate highly for their dividend prospects.
Liontrust Asset Management
I identified asset manager Liontrust(LSE: LIO) as a top stock for 2018 back in the first week of January. Three months later and the shares are up 18%, which is not a bad return at all when you consider the volatility across global markets in that time.
Liontrust runs a range of active funds including global equity and sustainable investing mandates. While many investors are concerned that passive investment management is a significant threat to the long-term future of active management, a trading update from the firm today suggests that the demand for active management remains robust.
Indeed, for the three-month period to the end of March, the asset manager enjoyed net inflows of £255m, up from £200m in the same period last year. For the financial year to 31 March, net inflows were £1,004m, up from £482m last year. Total assets under management rose to £10.5bn at 31 March, up from £6.5bn last year, boosted by the acquisition of Alliance Trust Investments.
Liontrust's dividend prospects look attractive, in my view. Since reinstating its dividend in 2013 with a 1p per share payout, it has increased its distribution by 1,400% to 15p per per share last year. City analysts expect a hike of around 24% for FY2018, which would take the payout to 18.7p, a yield of 3.2% at the current share price. A further hike of 16% is anticipated for FY2019, which would push the prospective yield to almost 4%.
Despite the 18% share price rise this year, the stock remains attractively valued, trading on a forward-looking P/E ratio of just 13.2. I see the potential for further gains.
Another under-the-radar dividend growth stock that looks to have investment appeal is Keller Group(LSE: KLR), the world's largest independent ground engineering company. It specialises in providing advanced foundation solutions for complex projects and has operations in 40 countries across five continents.
The company has an impressive dividend history, having not cut its payout since it paid its first dividend way back in 1998. In this time, the dividend has been increased from 6.5p per share to 34.2p, an increase of 426%. The stock has a trailing yield of 3.5% at present.
Recent FY2017 results were solid, with revenue rising 10% at constant currency and underlying EPS surging 30%. The company advised that it expects 2018 to be another year of "underlying progress" and that leads me to believe there could be further dividend hikes on the horizon. City analysts expect the dividend to be increased 5% and 6% this year and next, yet with dividend coverage looking strong I think there could be potential for greater increases. Trading on a forward P/E of just 10.1, Keller offers strong dividend growth appeal, in my view.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. There are no strings attached, simply click here for your free copy.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Liontrust Asset Management. 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.