This year could be a pivotal year for income investors. Inflation has already moved above 3%, and as Brexit draws closer, it would be unsurprising for the price level to rise at an even faster pace. Dividend stocks could therefore become more attractive to a range of investors. This could help to push their share prices higher, which may lead to an enticing mix of capital growth and income returns.
With that in mind, here are two companies with strong dividend growth potential. Over the medium term they could deliver high total returns.
Georgia-focused investment company BGEO (LSE: BGEO) announced on Tuesday that its real estate subsidiary has acquired a 50% stake from a third-party in a boutique hotel. The total cash consideration is $4.1m, with the hotel expected to add at least 100 rooms to the company's portfolio. Completion of the hotel is due to take place in the first quarter of 2019 and with tourism in the area increasing by 27% in 2017, the sector could be a strong growth area.
As well as this, it also announced that Georgia's utility and energy regulator has approved new tariffs for water supply and sanitation. They are expected to help the company to further reduce water losses and should help it to continue to upgrade existing infrastructure in the region.
With a dividend yield of 3.2%, BGEO already offers a real income return at the present time. Since dividends are covered 3.3 times by profit, there seems to be scope for a significantly higher dividend payout in future, and this could help to catalyse the company's share price. With the company's bottom line due to rise by 14% this year, it trades on a price-to-earnings growth (PEG) ratio of just 0.7. This suggests that it offers excellent value for money for the long term.
Also offering an upbeat outlook from an income perspective is beverages company Diageo(LSE: DGE). Its performance in the previous financial year showed that as well as offering defensive characteristics, it remains a capable growth stock. Its bottom line increased by 21%, with a growing exposure to emerging markets benefitting the company's overall performance.
Looking ahead, Diageo has the capacity to improve its efficiency. It is seeking to increase its margins over the medium term, and this could help it to become less reliant on pricing power and favourable trading conditions in its key markets. As such, the company's earnings are due to rise by 7% in the current year, with higher growth possible in future years.
Although the stock has a dividend yield of just 2.5% at the present time, there is scope for a higher dividend in future. In fact, it could rise at a faster pace than earnings over the long run, since it is currently covered 1.7 times by profit. For a mature and stable business, that figure seems high and this could lead to a favourable period in terms of the rate of dividend growth.
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Peter Stephens owns shares in Diageo. The Motley Fool UK has recommended Diageo. 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.