Dividend shares which offer over 20% growth within two years are difficult to find. Often, improving investor sentiment has compressed their yields and reduced the potential upside on offer. However, reporting on Wednesday was a company which has an above-average yield and could return over 20% in capital gains between now and 2019.
Strong 2016 performance
The company in question is automotive retailer and distributor Inchcape(LSE: INCH). Its performance in 2016 was impressive, with the company reporting a rise in revenue of 14.7% and an increase in adjusted earnings of 14.4%. Its performance was aided by weak sterling, which means it could continue to benefit from a weak pound during the course of 2017.
Of course, the company's strategy also aided its 2016 outcome. It achieved good profits from its Used Vehicles and Aftersales division, while it has improved its alignment to become a partner of choice for leading automotive brands. This has allowed it to enter into potentially lucrative markets such as Thailand with Jaguar Land Rover and South America with Subaru. This provides Inchcape with growth prospects within faster-growing economies across the developing world, which could rejuvenate its bottom line growth rate.
Looking ahead, Inchcape is expected to record a rise in its earnings of 4% in the current year and 6% next year. Assuming it remains on the same rating as today, this means its shares could gain over 10% within two years.
Furthermore, the company's price-to-earnings (P/E) ratio of 12.9 is lower than its four-year average of 13.7. If it reverts to its mean rating and meets its forecasts over the next two years then its shares could be trading around 20% higher by 2019. And with the prospect of a weak pound between now and then, an upgrade to its earnings growth rate is possible.
In addition to capital growth potential, Inchcape remains a sound income stock. It currently yields 3.3% from a dividend which is covered 2.4 times by profit. This indicates there is scope for a rapidly rising dividend over the medium term following 2016's increase in shareholder payouts of 13.9%.
Clearly, the automotive market is relatively cyclical and investors may therefore prefer a consumer stock which is more defensive. That's especially the case since Brexit will take place in the next couple of years and the outlook for the global economy is uncertain. As such, funeral services provider Dignity (LSE: DTY) may become increasingly popular.
It has recorded a double-digit rise in its bottom line in each of the last four years. Therefore, it is likely to perform well in future - especially since its financial performance is less positively correlated to the wider index than for most FTSE 350 stocks. However, with Dignity trading on a P/E ratio of 22.8 and yielding just 1%, its upside potential and income prospects seem limited. As such, despite its riskier business model, Inchcape seems to be the superior buy.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.