Dividend stocks look set to become increasingly popular over the medium term. Inflation has hit 2.9%, and there is a good chance it will rise above and beyond 3% according to various forecasts. This could make obtaining a positive real-terms yield more challenging for income investors. Therefore, buying shares with a mix of high yields and sound dividend growth prospects could be a shrewd move. Here are two companies which could be worth a closer look.
Updating the market on Wednesday was currency management provider Record(LSE: REC). It announced a tender offer to return up to £10m to its shareholders via the purchase of a maximum of just over 22m ordinary shares which represent 10% of the share capital of the company. Each investor in the company is entitled to tender up to 10% of their shareholding at the tender price of 0.4479p per share. There is the potential for a greater proportion to be tendered by an individual investor, depending on the number of shares tendered by other shareholders in total.
As well as the return of capital to investors, Record also has a healthy dividend yield of 5.1%. This is expected to reach as much as 7.2% next year as dividend growth of over 40% is forecast in 2018. This has the potential to significantly improve investor sentiment in the company, and it could lead to a higher share price in future.
With Record trading on a price-to-earnings growth (PEG) ratio of 1.8, it seems to offer attractive value for money for the long term. Certainly, it is a smaller company which carries significant risks and volatility due in part to its area of operations. However, for investors seeking a high yield, it could be worth a closer look.
Also offering a bright future from an income perspective is fellow financial services company Frenkel Topping Group (LSE: FEN). The provider of financial services advice is expected to return to strong profit growth over the next couple of years, with its bottom line due to rise by 37% in the next financial year. This means higher dividends could be on the cards, while its PEG ratio of 0.3 remains highly enticing even after a share price rise of 38% in the last year.
Although the company's dividend yield currently stands at just 1.8%, dividend growth is expected to be around 25% per annum during the next two years. This is expected to push the company's yield to as much as 2.7% by 2018. But even then, Frenkel Topping's dividend is set to be covered 3.1 times by profit. This suggests that further rapid dividend growth could be on the horizon, which may make the stock even more attractive.
Given this potential, now could be the right time to buy it ahead of inflation-beating income prospects. While its yield may be relatively low today, it could easily surpass inflation over the medium term.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.