News released today regarding inflation is likely to cause further challenges for income investors. Inflation now stands at 2.9%, which is almost four times higher than its level from a year ago. Much of it is due to a weaker pound and, since political uncertainty is high, inflation is forecast to rise to above and beyond 3% over the medium term.
With that in mind, here are two companies which appear to offer upbeat income prospects. As such, they could be worth a closer look for investors who are seeking to stay ahead of inflation in 2017 and beyond.
Dividend growth potential
Reporting on Tuesday was prepaid gift, reward and savings specialist Park Group (LSE: PKG). The company delivered a rise in operating profit during the most recent financial year, with profit before tax up 4.2% to £12.4m. This growth was due in part to a focus on technology, with over 90% of the company’s total orders taken online versus only 10% nine years ago. Further progress is set to be made in this space, with the company’s positive trading performance from the second half of the year expected to continue into next year.
The company’s rising profitability allowed dividends for the full year to rise by 5.5%. This puts the business on a dividend yield of 3.6%, which is 70 basis points higher than the current rate of inflation. However, dividend growth over the next two years means this gap should increase. Park Group is expected to record a rise in shareholder payouts of 5.7% per annum in the next two financial years. Even after a strong rate of growth in dividends, shareholder payouts are due to be covered 1.9 times by profit, which suggests more growth could lie ahead over the medium term.
Dirt-cheap income opportunity
While Park Group’s dividend yield could rise over the medium term, financial services company International Personal Finance (LSE: IPF) offers a high yield right now. The consumer finance product specialist has a dividend yield of 8.2%, which is 2.8 times higher than the current rate of inflation and more than twice the dividend yield offered by the FTSE 100 at the present time.
Despite having such a high yield, it does not appear to be a yield trap. Evidence of this can be seen in the affordability of shareholder payouts, with them being covered 2.3 times by profit. This suggests that dividends could grow at a faster pace than profit over the medium term without hurting the company’s reinvestment potential.
As well as a high dividend yield, IPF also offers excellent value for money. The company trades on a price-to-earnings growth (PEG) ratio of only 0.4, which indicates share price growth potential is high. This mix of income, value and growth potential could lead to a rapidly-rising share price which not only exceeds inflation, but beats the FTSE 100 too.
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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.