2 beaten-down shares with dividend growth potential

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Next clothes shop

In the last six months, the FTSE 100 has risen by over 6%. However, not all of its constituents have delivered such strong performance. A number of companies have seen their share prices fall either because of disappointing results or a decline in investor sentiment. While it may seem as though buying them is a risky move, such stocks could offer a wide margin of safety as well as a high yield. Here are two prime examples that could prove to be excellent income stocks.

A troubled retailer?

Next's (LSE: NXT) share price has slumped 22% in the last six months. This is primarily due to disappointing results that showed the company is struggling to deliver profit growth given current trading conditions. Realistically, the challenges it has faced in recent months could continue as Brexit negotiations may send inflation higher and consumer confidence lower.

However, Next now appears to have a relatively wide margin of safety which improves its investment outlook. For example, it trades on a price-to-earnings (P/E) ratio of just 9. Furthermore, it's expected to return to positive earnings growth in the 2019 financial year. This could boost investor sentiment and push its share price higher, while also improving prospects for its dividend.

Following its share price fall, Next now yields around 4.1%. However, it's expected to pay special dividends in each quarter totalling £1.80 per share per annum. This means its yield for the forthcoming year is around 8.7%, which makes it one of the highest yielding stocks on the FTSE 100. As such, even if the short term is volatile due to Brexit uncertainty, in the long run Next could be a top-notch income stock.

Long-term growth potential

Unilever (LSE: ULVR) has recorded a share price fall of 9% in the last six months. However, its business performance has remained strong and it seems to be well positioned to deliver high returns in the long run. Key to this is its exposure to emerging markets, where rising wealth and an increasing focus on the consumer economy should equate to higher demand for the company's products.

While Unilever's yield of 3.6% is roughly in line with the FTSE 100, its dividend growth prospects are bright. Its shareholder payouts are covered 1.5 times by profit and so dividends could be raised faster than profit growth over the medium term. And since it has a relatively stable, consistent and robust business model, the company could offer a safer and more predictable income stream than is the case for many other higher-yielding stocks.

For investors seeking a dividend likely to stay ahead of inflation this year, Unilever could be a sound option. It may not have the highest yield, but it's likely to move higher at a rapid rate due to profit growth and the company's sound financial standing.

But should you first focus on this income stock?

Despite their appeal, neither Next nor Unilever have been named as A Top Income Share From The Motley Fool.

The company that has been given that accolade offers a potent mix of a high yield and strong dividend growth potential. As such, it could deliver a high income return for your portfolio in 2017 and beyond.

Click here to find out all about it - doing so is completely free and comes without any obligation.

Peter Stephens owns shares of Unilever. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.