With the FTSE 100 experiencing a volatile period in recent months, many investors may naturally be drawn to a Cash ISA. After all, a Cash ISA lacks a risk of capital loss, while there is scope for a rise in interest rates over the long run.
However, the reality is that interest rates are not expected to increase to ‘normal’ levels of 4-5% for a number of years. In the meantime, a Cash ISA is likely to offer lower returns than inflation.
As such, buying these two dividend growth shares could be a shrewd idea. They appear to offer improving income prospects and trade on fair valuations compared to their FTSE 100 index peers.
While dividend growth has been lacking for investors in AstraZeneca (LSE: AZN) for a number of years, the company’s improving financial prospects could lead to a rising shareholder payout.
The pharma stock’s investment in its product pipeline seems to be paying off, with it reporting strong growth in its most recent results. This trend is forecast to continue, with the company expected to post a rise in net profit of around 12% in the current year.
With demand for a variety of healthcare products forecast to rise as a result of longer life expectancies and a rising population, AstraZeneca could maintain a relatively high rate of profit growth over the medium term.
Since its dividends are presently covered 1.4 times by net profit, the company could realistically pay out a significant proportion of future profit growth to shareholders without negatively impacting on its financial standing. With a price-to-earnings growth (PEG) ratio of 1.7, the stock appears to offer a wide margin of safety.
Another FTSE 100 stock that is expected to raise dividends at a brisk pace is RBS (LSE: RBS). In the current year, for example, the bank’s dividends per share (including special dividends) are forecast to rise from 5.5p to 12.7p. That’s an increase of 131%, which puts the stock on a forward dividend yield of almost 7%.
Clearly, there are likely to be FTSE 100 stocks that offer a more robust income investing outlook than RBS. It faces risks such as a change in management, continued financial challenges and the uncertainty which Brexit potentially brings.
However, with the bank trading on a price-to-earnings (P/E) ratio of 6.6, it seems to offer a wide margin of safety. Although this may not prevent further share price falls, it could mean that there is scope for capital growth over the long run.
Although the company recently reported that difficult market conditions mean it is unlikely to meet its financial targets in the next financial year, it was able to reduce costs in the first half of the current year.
As such, it is expected to become increasingly efficient, which is forecast to lead to earnings growth of 5% in the current year. This could help to support a rising dividend over the coming years.
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Peter Stephens owns shares of AstraZeneca and Royal Bank of Scotland Group. The Motley Fool UK has recommended AstraZeneca. 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.
Motley Fool UK 2019