While Barclays(LSE: BARC) may yield only 1.6% at the present time, over the coming years it is set to deliver rapid dividend growth. This could have the effect of increasing demand for the company's shares, which may lead to a higher stock price. And with inflation continuing to move higher, now could be the perfect time to buy a slice of the bank for the long term.
A changing outlook
Under its present management team, Barclays has not yet delivered for income investors. It has cut dividends, rather than raising them, and has instead focused on improving the quality of the business. This has involved investment as well as some restructuring. However, that phase of the bank's plan is now complete, which leaves it with the opportunity to generate higher profitability over the long run.
Next year, dividends at the bank are expected to double. This means in 2018 it could be yielding as much as 3.3%. While still behind the FTSE 100's yield of 3.8%, this would return the stock to its previous status as a realistic income play.
Looking beyond next year, more dividend growth seems very likely. As mentioned, it has now completed its restructuring and will be better-placed to pay out a higher proportion of profit as a dividend. This means that next year's forecast payout ratio of 29% could easily double to put the bank on a forward yield of as much as 6.7% over the next few years.
While political risk in the US and Europe remains heightened, Barclays looks set to benefit from a generally favourable market outlook. Monetary policy makers are set to continue to adopt a dovish stance across the developed world, while fiscal policy may become increasingly expansionary as governments seek to move on from the age of austerity.
Since the bank operates in a range of markets and has a diverse set of operations, it also offers less risk than many of its sector peers. Should Brexit create greater uncertainty, for example, this may allow it to perform better than many of its industry rivals. As such, its risk/reward ratio appears to be highly favourable.
Of course, some investors may prefer to own a stock which pays a high dividend yield today. Utility company SSE(LSE: SSE) has one of the highest yields in the FTSE 100. It currently yields 6.5% and its main priority is to grow dividends by at least as much as inflation over the medium term. With inflation forecast to move higher in future years, this could mean its shares become increasingly popular among income investors.
Certainly, there is increasing political risk for domestic energy companies such as SSE. This could hold back its share price performance in the near term. However, with high potential rewards through a stunning dividend yield, it continues to offer strong income prospects for the long term.
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Peter Stephens owns shares of Barclays and SSE. The Motley Fool UK has recommended Barclays. 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