With the stock market flying high, it's become increasingly difficult for income investors to find blue-chip dividend stocks for a reasonable price. But shrewd investors willing to invest in smaller companies can still find a number of under-appreciated stocks with some compelling dividend growth potential. Here are two I've had my eye on lately.
Photo-Me International (LSE: PHTM), a small-cap company which sells and operates a wide range of instant service equipment, offers prospective income investors a dividend yield of 4.3% that is backed up by robust earnings growth.
Growth for the company is underpinned by two key tailwinds. First is the rollout of improved ID security and secured upload technology in France and Ireland, which is set to give Photo-Me booths a boost.
As a leading global operator of self-service photo booths, it is uniquely positioned to benefit from the introduction of these new technology features, because its huge scale means it can spread out the fixed costs of investment over more units.
Second, the company is set to benefit from technology disruption as the expansion of its laundry business continues apace. Photo-Me has recently launched two smaller self-service laundry units. This should help the company increase its presence in the Asia, particularly Japan, which is estimated to be one of the largest worldwide market for laundrettes.
Shareholders in the company have seen their payouts increase by 180% in the past five years, with a compound annual growth rate (CAGR) of 22.9% in dividends per share since 2012. Indeed, shares in the company reflect its track record on earnings and dividend growth, as they have gained more than 330% over the same period.
Despite these gains, the stock's valuation seems reasonable. It trades at a forward P/E of 16.7, based on City forecasts that this year's earnings will rise 6% to 9.8p a share. And looking further ahead, analysts expect its earnings to climb another 6% next year, which means its forward P/E, based on its 2018 expected earnings, would fall to just 15.6.
That said, forecast growth is still a far cry from its 20%-plus rates seen recently by the company, and this explains why its forward P/E has fallen from its three-year historical average of 20.8.
Another under-appreciated winner of the past few years is STV Group(LSE: STVG). Shares of the firm are up 316% over the past five years as the Scottish media company has delivered an impressive turnaround in its financial performance.
As TV audience numbers decline, because of fragmentation in the market and the rise of online media consumption, STV is doing well in its shift away from dependence on broadcast. Last year, revenue rose 3% to £120.4m, although operating profit still declined by 3% to £19.7m.
However, digital revenues rose by 20% to £7.9m, with the margin for the segment continuing to grow above its target level of 52%. And thanks to strong cash flow, dividends were raised by 50% to 15p a share, which gives STV a tempting dividend yield of 3.9%.
Looking ahead, City analysts expect more growth to come, as STV is forecast to raise dividends by 13% this year, with a further increase of 9% in 2018.
Jack Tang 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.