Dividend stocks are an appealing source of income for retirement. They can offer a relatively high yield and there's the potential for the dividend to advance ahead of inflation, increasing its real value year after year.
Of course, profits must grow over time if an increasing dividend is to be sustainable. Today, I'm looking at two FTSE 100 companies which have above-average yields and which I believe are set for strong profit growth in the coming years. Such stocks tend to deliver good capital gains in addition to a high and growing dividend flow.
Five years of struggle
Long-term shareholders of AstraZeneca(LSE: AZN) have seen their company endure a difficult period over the last five years. Revenue and profits have fallen because patents have expired on some of its top-selling products opening the way for generic competition.
Despite the difficulties, Astra has at least managed to maintain its dividend -- at $2.80 a share -- although this has meant that its real value to shareholders has been gradually eroded by inflation. However, the good news is that the company's fortunes are set to improve markedly in the coming years.
Chief executive Pascal Soriot has worked hard to restructure and reinvigorate the business since his arrival in 2012. His efforts are beginning to pay off and the market is beginning to appreciate the potential of the company's robust pipeline of new drugs. For example, the announcement of positive trial results last month for its Imfinzi treatment of non-small cell lung cancer saw the shares immediately rise by more than 10%.
Astra fought off a takeover bid from US giant Pfizer three years ago, saying the 5,500p a share offer undervalued the business. As part of the defence, Mr Soriot said Astra was targeting revenue of $45bn by 2023. Revenue last year was $21m, so the rate of top-line growth over the next five years will be considerable if the company is to meet its target. And that should drive strong growth in profits.
Astra's shares are currently trading at 5,400p -- just below the level of the Pfizer bid, three years on -- and the $2.80 a share dividend (about 220p at current exchange rates) gives a yield of 4.1%. With the company on the cusp of powering up revenues and profits, investors can hope for a rising dividend stream and continuing appreciation of the share price.
In contrast to AstraZeneca, Provident Financial(LSE: PFG) has thrived over the past five years. Strong earnings growth has supported a dividend that's increased from 77.2p a share in 2012 to 134.6p last year. The UK's leading non-standard lender consolidated its position as conventional banks became more risk-averse and reluctant to lend in the wake of the financial crisis.
Has Provident enjoyed a boom period that's now set to end? I don't believe so. The company has invested heavily in its businesses and systems and is the dominant player in what is a structurally-changed lending market.
I'm anticipating profits to continue to grow strongly in the coming years. City analysts are forecasting a dividend increase of over 6% this year, followed by a double-digit percentage next year. This gives a yield of 5%, rising to 5.5% -- at a current share price of 2,885p -- and I see this as another stock that could add strong capital gains to its excellent income prospects.
G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. 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.