With inflation moving higher, many investors may be seeking dividend shares they can buy and hold for the long run. However, constantly checking to see how a company's performance and dividend are changing may not always be possible. With that in mind, here are two shares which offer a mix of high yields, dividend growth and business models that have the potential for gradually improving performance in the long run.
With a dividend yield of 4.2%, Pets At Home(LSE: PETS) offers obvious income appeal. However, it could also prove to be a sound means of beating higher inflation and generating relatively high capital gains. For example, the company's dividends are covered twice by profit, which indicates that they could rise at a faster rate than net profit growth over the medium term.
Furthermore, demand for pet products is likely to remain surprisingly resilient. Even though consumer confidence is relatively low and Brexit could cause greater uncertainty for the wider retail sector, Pets At Home is forecast to record a rise in its bottom line in each of the next two years. Pet owners have historically maintained spending on their cats, dogs, rabbits, gerbils and parrots, even if they reduce spending elsewhere due to higher rates of inflation. This could mean Pets At Home outperforms the wider retail sector during the next few years.
Since the company trades on a price-to-earnings (P/E) ratio of just 12, it seems to offer significant upside potential. Its historic average P/E ratio is 18. While that may not be achieved in the course of 2017 due to uncertainty within the retail sector, it shows that the company's shares offer a wide margin of safety.
Strong track record
As well as a high yield, dividend growth potential matters to investors. In fact, since inflation has already moved to almost 2% this year, dividend growth could become increasingly significant as investors chase a real-terms rise in their income. One company which has a strong track record of dividend growth is transport business Stagecoach(LSE: SGC).
In fact, over the last five years its dividends per share have risen by 53%. This works out as an annualised rate of 8.8%, which is clearly well ahead of inflation. Looking ahead, more dividend growth is on the cards because Stagecoach's dividends are currently covered around twice by profit. As such, even if earnings come under pressure due to economic challenges, inflation-beating shareholder payout growth could be on the cards.
Stagecoach currently trades on a P/E ratio of just 8.2. This indicates that it offers a wide margin of safety and may deliver steady capital growth over a sustained period. Furthermore, with a dividend yield of 6%, it appears to be a stock which can be bought and held for a long period of time. Certainly, its performance may not be as stable as more defensive shares, owing to its beta of 1.5. However, for long-term investors, it appears to be a sound buy at the present time.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Stagecoach. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.