Why dividends can help you uncover the best ASX growth stocks

These companies may not offer high yields of 4-7% typically associated with well-known dividend stocks but they have managed to consistently grow their payouts over the past 6-12 years, underpinned by strong underlying earnings growth.

Growth with dividends

I have excluded the four companies (APA Group, AUB Group, Charter Hall and Soul Patts) that are tracking towards dividend aristocrat status.

• Most dominant sectors: Tech and Financials both recorded three stocks
• Other sectors: Healthcare and Materials both recorded two stocks and Real Estate, Discretionary, Telcos and Industrials all recorded one stock each
• Avg 12-month trailing dividend: 2.6%
• Highest dividend yield: IPH at 5.8%
• Lowest dividend yield: Wisetech Global at 0.13%
• Avg 1-year return: 27% (Best: Pro Medicus 117%, Worst: IPH -20%)
• Avg 3-year return: 43% (Best: Pro Medicus 166%, Worst: Sonic Healthcare -37%)
• Avg 5-year return: 128% (Best: Pro Medicus 444%, Worst: IPH -32%)
• Avg 10-year return: 2,398% (Wisetech, Netwealth and IPH have been listed for less than ten years and the average is massively inflated by Pro Medicus +16,891%, Hub24 +5,695% and Northern Star +1,007%) If you omit those three, the average is still an impressive 348%

Key Takeaways

• Attracting investors with dividend mandates – Some funds may only invest in dividend-paying companies. By paying a dividend (even if it is a tiny one), they will attract inflows from certain institutions and funds
• Because I can – These fast-growing tech companies have reached critical mass. They're profitable and able to return a small portion of profits back to shareholders while retaining the rest for growth.
• Founder-led income – Most of these companies are either founder-led or management owns millions of shares. A small dividend is one way to take money out of the business without offloading shares (e.g. Wisetech might have a 0.13% dividend yield but that still equates to approximately $19 million in dividends for CEO Richard White)

Big growth: When examining the more growth-oriented companies on the list, analysts see the potential for significant dividend growth in percentage terms over the near term. Here are a few examples:

• Wisetech: Citi forecasts average annual earnings and dividend per share growth of 43.9% and 43.7% respectively over the next three years. Despite the extraordinary dividend growth, the yield will still track around 0.2-0.4%.
• Pro Medicus: Macquarie is expecting average annual earnings and dividend growth of 31% and 103% respectively over the next two years. Likewise, the dividend yield will still sit below 1.0%

'Aristocrats' at a glance

The longest winning streak currently on the ASX is held by Washington H Soul Pattinson, which is on track to deliver 24 consecutive years of ordinary dividend growth.

• 1-year average: 9%
• 3-year average: -4%
• 5-year average: 55%
• 10-year average: 152%

• 1-year: -3.2%
• 3-year: -8.7%
• 5-year: 25.7%
• 10-year: 206.2%

Bottom line

This article first appeared on Market Index.