2 dividend growth stocks that could help you beat the FTSE 100

The Motley Fool
Man making notes on graphs and charts
Man making notes on graphs and charts

The performance of the FTSE 100 has been mixed in 2018. It's currently around 100 points down on its starting price, but has experienced a recent surge since a difficult first couple of months of the year. Still, the index is up by over 1,500 points in the last six years, which works out as an annualised return of almost 4%, plus dividends.

While prospects for the FTSE 100 may be relatively positive at the present time, a number of shares could outperform it in the long run. Here are two prime examples which could be worth a closer look due in part to their dividend growth potential.

Uncertain future

The outlook for the UK housing market is currently uncertain. Brexit has contributed to a decline in consumer confidence, while concerns surrounding affordability have naturally come to the fore after nearly two decades of house price rises. As such, the share price performance of FTSE 100 housebuilders such as Persimmon(LSE: PSN) has been volatile and generally disappointing.

However, the outlook for the company remains attractive. It's forecast to post improving earnings figures in each of the next two financial years, while population growth is expected to be considerably higher than the volume of new homes being built in the UK. Alongside policies such as the help to buy scheme, this could mean demand remains well ahead of supply and that house prices continue their upward trajectory after a brief pause.

With Persimmon having a capital return plan in place, it currently yields around 7.8% based on its payment schedule for the next three years. Since dividends are due to be covered around 1.4 times by profit in each of the next two years, it would be unsurprising to see a further increase in shareholder returns over the medium term.

Mixed performance

Also facing an uncertain outlook in the UK at the present time is specialist building products supplier SIG(LSE: SHI). The company reported a relatively positive half-year trading update on Wednesday which showed that revenue growth was flat versus the comparable period, with a 3.1% decline in UK sales offset by growth in mainland Europe.

Looking ahead, the company expects this situation to continue. It's experiencing particular challenges in the commercial new build sector, as well as in the repair, maintenance and improvement segment. However, the business appears to be on track to deliver a significant improvement in its operational performance, with meaningful cost benefits due to be realised in the second half of the year.

With SIG yielding around 3% at the present time from a dividend which is covered 2.6 times by profit, its dividend growth potential appears to be sound. That's especially the case since its bottom line is forecast to grow by 17% next year, with a price-to-earnings growth (PEG) ratio of 0.8 suggesting its shares are undervalued.

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Peter Stephens owns shares of Persimmon. 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.