2 top dividend growth stocks I'd buy in May

Updated: 
ITV

A high dividend yield is a wonderful thing; however, yield-hungry investors need to be wary of the risk that the dividend could be cut. When it comes to seeking dividend stocks, investors should keep a keen eye on dividend cover and the outlook for dividend growth.

With this in mind, I'm taking a look at two stocks with solid dividend cover and serious dividend growth potential.

Attractive fundamentals

Public transport company National Express(LSE: NEX) has attractive fundamentals, with the firm forecast to post earnings growth of 7% and 8% in 2017 and 2018, respectively.

Valuations seem reasonable, too, with the stock trading at just 12.2 times expected earnings in 2017. National Express currently yields 3.5%, but with City analysts expecting dividend growth of 9-10% this year, its prospective dividend yield in 2017 is forecast to rise to 3.8%.

Looking ahead, National Express is set to benefit from a number of tailwinds. Along with lower fuel costs, the company should gain from cheaper financing costs after a recent refinancing of a major portion of its debts. Its German rail operations, which just completed its first full year of business, is also doing well, with National Express delivering significant operational improvements.

Indeed, challenging market conditions in its UK bus division will likely continue to hold back growth. However, almost all of the company's other divisions are continuing to grow at a robust pace, particularly its rail and international franchises.

And with the company generating £136.8m in annual free cash flow, it has more than double the cash needed to pay for its dividends. There is also plenty left over for new investments, with National Express expected to spend less than 50% of adjusted earnings to cover dividend payments going forward.

Thus, with solid free cash flow cover and an attractive earnings outlook underpinning its dividend growth outlook, I reckon National Express shares are a great long-term pick for investors seeking reliable dividend growth.

Double-digit growth

ITV's (LSE: ITV) dividend has increased by an average annual rate of 15% over the last three years. The broadcaster now boasts a dividend yield of 3.2%. And if ITV continues growing its dividend at the current pace, which many sell-side analysts expect it to, the company's dividend yield would rise to 4.4% by 2018.

Are these expectations realistic? Probably so. The company has delivered robust double-digit earnings growth over recent years and it has dividend cover of more than 2.3 times, based on adjusted earnings per share of 17.0p in 2016.

And although Brexit uncertainty may take its toll on advertising revenues, I expect ITV should still be on track to continue improving its bottom line due to its growing digital business and healthy pipeline of new and returning programmes. The company is also undergoing a bit of a transformation in terms of developing its online and subscription services, which I think will yield great benefits.

As such, I believe its shares could prove to be a strong performer over the medium term. ITV shares seem fairly valued, trading at almost 12 times last year's adjusted earnings.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended ITV. 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.