TOL - 17th Sep, 2024
Why dividends can help you uncover the best ASX growth stocks
There's a unique cohort of growth stocks that have also increased their dividends every year for the past 6-12 years.
In my search for ASX-listed dividend aristocrats – companies that have increased their dividend annually for 25 years or more – I came across a unique cohort of dividend-paying, growth stocks that have outperformed the market.
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
The table below refers to current S&P/ASX 200 members that have increased their nominal dividends year-on-year for at least six years. The table also highlights their 1, 3, 5 and 10-year returns (where available).
I have excluded the four companies (APA Group, AUB Group, Charter Hall and Soul Patts) that are tracking towards dividend aristocrat status.
|
Ticker
|
Company
|
Streak
|
1 Year
|
3 Year
|
5 Year
|
10 Year
|
|---|---|---|---|---|---|---|
|
Arena Reit
|
12
|
13%
|
-1%
|
47%
|
181%
|
|
|
Brickworks
|
11
|
-7%
|
0%
|
49%
|
94%
|
|
|
Collins Foods
|
10
|
-17%
|
-36%
|
-19%
|
255%
|
|
|
Chorus
|
9
|
22%
|
27%
|
72%
|
400%
|
|
|
Data#3
|
6
|
12%
|
51%
|
187%
|
934%
|
|
|
Hub24
|
6
|
68%
|
93%
|
345%
|
5,695%
|
|
|
IPH
|
10
|
-20%
|
-35%
|
-32%
|
NA
|
|
|
Northern Star
|
10
|
31%
|
55%
|
34%
|
1,007%
|
|
|
Netwealth Group
|
6
|
43%
|
55%
|
154%
|
NA
|
|
|
Pro Medicus
|
9
|
117%
|
166%
|
444%
|
16,891%
|
|
|
Steadfast Group
|
11
|
-1%
|
13%
|
50%
|
256%
|
|
|
Sonic Healthcare
|
12
|
-15%
|
-37%
|
-5%
|
51%
|
|
|
Technology One
|
11
|
43%
|
95%
|
205%
|
617%
|
|
|
Wisetech Global
|
8
|
88%
|
155%
|
256%
|
NA
|
Numbers at a glance
- 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
Strategic dividend payments: Several companies, including Hub24, Netwealth, Pro Medicus, Technology One and Wisetech, yield less than 2% but they do so for strategic reasons:
- 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)
Inverse relationship: Interestingly, lower-yielding stocks like Wisetech, Technology One and Pro Medicus have shown stronger growth and outperformed higher-yielding counterparts such as Arena REIT, Brickworks, IPH and Sonic Healthcare.
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%
There are still a few underperformers: While consistent dividend growth is often seen as a positive sign, it doesn't guarantee strong overall performance. Companies like Brickworks, Collins Foods, Sonic Healthcare, and IPH have underperformed across various time frames.
'Aristocrats' at a glance
These are the four ASX-listed companies that have managed to grow their dividends every year, for at least 14 years.
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.
|
Ticker
|
Company
|
1 Year
|
3 Year
|
5 Year
|
10 Year
|
TTM Yield
|
|---|---|---|---|---|---|---|
|
APA Group
|
-15%
|
-19%
|
-37%
|
3%
|
7.67%
|
|
|
AUB Group
|
-5%
|
27%
|
172%
|
184%
|
2.64%
|
|
|
Charter Hall Group
|
56%
|
-9%
|
39%
|
290%
|
2.86%
|
|
|
Washington H Soul Pattinson
|
-2%
|
-17%
|
45%
|
130%
|
2.74%
|
How do they stand?
Despite the impressive consistency, the average trailing twelve-month dividend yield is only 3.98%, largely propped up by APA Group. The other three average a yield of only 2.75%, not much higher than the 2.6% average from the growth cohort. From a share price performance perspective, they fall short on all time horizons:
- 1-year average: 9%
- 3-year average: -4%
- 5-year average: 55%
- 10-year average: 152%
Having said that, if we strip out the growth/tech companies from the above cohort (e.g. take out WTC ,TNE, PME, NWL, NST, HUB, DTL) the average returns drop to jvvust:
- 1-year: -3.2%
- 3-year: -8.7%
- 5-year: 25.7%
- 10-year: 206.2%
Bottom line
A company's ability to pay a growing dividend can serve as a useful indicator for finding growth stocks. For a growth company, offering even a modest dividend can signal a strong balance sheet and cash flow. Importantly, these companies manage to distribute dividends while preserving capital for growth and R&D.
This article first appeared on Market Index.
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Kerry is a Content Strategist at Market Index. He writes the daily Morning Wrap and Weekend Newsletter. Kerry is passionate about trading and the catalysts that influence the market. His content focuses on highlighting the key data and insights that matter most to investors.
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Kerry is a Content Strategist at Market Index. He writes the daily Morning Wrap and Weekend Newsletter. Kerry is passionate about trading and the catalysts that influence the market. His content focuses on highlighting the key data and insights...
Expertise
Kerry is a Content Strategist at Market Index. He writes the daily Morning Wrap and Weekend Newsletter. Kerry is passionate about trading and the catalysts that influence the market. His content focuses on highlighting the key data and insights...
Expertise
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