This 3%+ yielder is my top dividend growth pick

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Motor insurance company Hastings Group (LSE: HSTG) is my top dividend growth pick because it offers promising earnings growth potential and attractive valuations.

Earnings potential

The company is showing strong business momentum following eight consecutive quarters of profitable growth since its IPO in October 2015. Market share is growing steadily, with recent figures showing a 14% year-on-year increase in live customer policies and a 25% increase in gross written premiums for the nine months to 30 September 2017.

Looking ahead, fundamentals are robust, with future growth underpinned by its recent big investments in reinforcing its digital advantage and favourable motor pricing tailwinds. City analysts offer upbeat earnings forecasts, with underlying earnings expected to rise by 47% this year and 16% in 2018.

Downside risks

Not everyone is convinced though. Analysts from Shore Capital reckon Hastings cannot escape the pressures from the UK Government’s recent change in the Ogden discount rate. And although the company’s recent claims experience has so far held up well, in the longer term, these rate reductions will likely result in reduced margins across the industry.

Other key risks include a less favourable motor pricing environment, the rising cost of claims and regulatory uncertainty.

Still, I reckon Hastings’s shares have already taken account of these downside risk factors. Valuations are undemanding, with shares in the company trading at just 12.7 times its expected earnings in 2018. Dividends currently yield 3.5%, but they’re forecast to grow by 28% this year, with a further increase of 21% in the following year.

Student property

Elsewhere, student accommodation developer Unite Group (LSE: UTG) also has tempting dividend growth prospects.

Earnings growth is underpinned by structural factors, such as the growing student population and the shift in preferences towards living in purpose-built student accommodation, and its attractive development pipeline.

With a deep pipeline of around 6,500 beds to add to its portfolio within the next three years, the real estate investment trust (REIT) has a very promising short-cycle portfolio of development projects. This is expected to add around 20% more beds to its current portfolio and significantly boost its recurring annual earnings per share.

Significant improvement

As a result of its expanding portfolio of completed developments, the company could see underlying EPS grow from 25p in 2016 to between 42p-46p by 2020. And with the company targeting a 75% dividend payout ratio, this would give us a prospective dividend yield of 4.1% in 2020. That’s a significant improvement on the current dividend yield of just 1.8%, with the dividends per share potentially more than doubling over the next three years.

On the downside, valuations are pricey with shares in Unite Group trading at a 20% premium to its net asset value (NAV). It wasn’t that long ago when Unite traded at a discount to its NAV — it most recently did so only back in September. As such, I would rather wait for a dip in its share price before buying into this stock.

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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.

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