Is there an easier way to build wealth than a dividend growth strategy? As companies increase their dividend payouts over time, their share prices generally rise as a result of the increased payouts. This means that investors can enjoy both an increased level of income and capital gains, with minimal effort.
With that in mind, here's a look at two stocks that have recently raised their dividends.
Pennon Group(LSE: PNN) released its full year results in late May. While revenue was flat, EBITDA increased 8.4% to £486m and profit before tax rose a healthy 18.3% to £250m. Importantly for dividend investors, the company lifted its dividend payout from 33.58p last year to 35.96p this year, an increase of a robust 7.1%.
Pennon has an impressive dividend growth history, having increased its dividend from 26.52p five years ago to 35.96p for FY2017, a compound annual growth rate (CAGR) of 6.3%. And it looks like this level of growth should continue in the medium term, with the company saying: "We believe Pennon is well positioned now and for the future and our performance underpins our long established sector-leading 10-year dividend policy of 4% growth per annum above RPI inflation out to 2020."
While the company's dividend yield of 4.1% looks attractive, investors should note that dividend coverage has been thin recently, with coverage averaging just 1.25 times over the last three years. Furthermore, on a forward looking P/E ratio of 20 times FY2018 forecast earnings, Pennon looks a little expensive right now given the lack of revenue growth generated in recent years.
Also increasing its dividend recently was ITV(LSE: ITV), announcing back in March that its full-year dividend would be increased to 7.2p, a 20% increase on last year. Furthermore, the board also rewarded shareholders with a special dividend of 5p, taking the total payout for the year to a huge 12.2p.
ITV has been a fantastic dividend growth stock in recent years, with the company increasing its dividend from 1.6p in FY2011 to 7.2p last year, a CAGR of 35%. The firm has said that it is committed to a "long-term sustainable dividend policy" and that the ordinary dividend will "grow broadly in line with earnings." City analysts expect dividend growth of 17% and 4% for the next two years.
The market clearly has some concerns that political and economic uncertainty could drag down advertising revenues, and the share price has fallen 20% in the last two months as a result. However dividends and dividend growth rates give a powerful insight into a company's financial health, and you have to wonder whether ITV would lift its dividend by an impressive 20% and make a special payment if it thought there was significant trouble ahead. The company stated in March that it has the "flexibility and capacity to continue to invest across the business and deliver sustainable returns to our shareholders."
The share price fall has pushed the yield above 4%, and on forecast earnings of 15.9p for FY2017, the stock trades on a P/E of just 11.2 right now. At that valuation, I believe ITV is starting to look interesting.
Edward Sheldon 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.