Identifying dividend stocks with above-average growth potential can lead to surprisingly large gains. As a general rule, dividend growth will often provide support for share price growth, as long as the dividend remains affordable and supported by earnings.
+223% in five years
FTSE 100 publishing and information group Relx (LSE: RELX) is a rare beast -- a print publisher that's successfully made the switch to the internet. Known as Reed Elsevier until 2015, Relx publishes a large number of academic journals. It also fulfils a similar function in the legal sector and provides a range of information-based analytics tools.
Most of the firm's products are high-margin subscription services, which customers cannot afford to be without. This stickiness has given the company tremendous pricing power over the years.
This power becomes obvious when you look at the group's financial results. Revenue has only grown by an average of 3.2% since 2012, but adjusted operating profit has risen by an average of 5.4% per year. This suggests that Relx is continually able to increase its profit margins through a mixture of price hikes and cost-cutting.
Low costs and upfront subscription payments from customers mean that on average, 95% of the group's profits are converted into cash flow each year. That's a strong performance and has allowed the company to increase its dividend per share by an average of 10% per year since 2012.
Is Relx a buy?
The firm's share price has risen by 223% over the last five years. As you'd expect, this stock isn't cheap. However, the forecast P/E of 20 and 2.5% yield isn't necessarily too high to consider buying. If the company can continue to increase its profits at the rate we've seen in recent years, then I believe further gains could be possible.
A tempting 5% yield
You may not be familiar with Chesnara (LSE: CSN), but it belongs to a class of company that's performed well for investors in recent years. It specialises in managing closed books of life insurance business. It buys portfolios of insurance policies from other insurance firms and manages them until they've all expired.
In addition to this, some of the group's European subsidiaries write new insurance business, potentially providing a long-term growth opportunity.
The group's management seem to have done a good job of expanding while generating plenty of surplus cash for shareholders. The dividend has grown from 11.85p per share in 2005 to 19.5p per share today. Although that's only an average increase of 4.2% per year, I think it's pretty impressive given that dividend growth continued throughout the financial crisis.
Broker forecasts for 2017 earnings have risen by 22% since January, driving the shares higher. But the stock still only trades on a forecast P/E of 13 and offers a forecast yield of 5.2%. Also, this positive earnings momentum could bode well for 2018.
In my view, Chesnara could be a strong income buy. I'm definitely tempted to take a closer look.
Roland Head 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.