If you are looking for a way to the keep your portfolio growing with a good base, then these two stocks have attractive dividend yields and good earnings outlooks in the short and mid-term.
Insurance Australia Group Limited (ASX: IAG) has been raising its dividend regularly since 2009, from a total of 10 cents per share that year to 2013's total of 36 cps. Current yield is 6.63%. In 2013, underlying net profit rose from $428 million to $1.17 billion, although the payout ratio, the percentage of total earnings per share that are paid out as dividends, was 72%, down from its usually high ratio in the 90s.
It announced a $642 million net profit for H1 2014, up from the $461 million profit on the pcp, which was lower largely due to the $182 million loss connected with a UK business now discontinued. It is good to see that the company is trimming down sub-optimal businesses.
In contrast, it is acquiring the insurance business of Wesfarmers Ltd (ASX: WES) for $1.84 billion, with which it can build up its core Australian insurance base. The WFI and Lumley Insurance brands are included in the acquisition that is expected to be completed by second quarter 2014. The sale provides for a 10-year distribution agreement with Coles supermarkets, which is currently promoting its insurance offering on TV. The earnings growth potential means that dividends have a good opportunity to grow accordingly.
BWP Trust (ASX: BWP), the real estate trust which oversees the property development and management for Wesfarmers owned Bunnings Warehouse, has a 5.90% dividend yield, and with steadily rising earnings over the past 10 years, the trend for future growth is promising.
2013 full year underlying net profit was up from $69.9 million to $110.5 million, making earnings per share rise 55% to 20.78 cents per share. The company's expansion is linked to the overall growth of the well-known DIY hardware chain. With the earnings rise, it reduced the payout ratio to about 68% in 2013 when beforehand it was usually in the mid-90s to 100%. That means they are keeping more to feed back into future growth.
Foolish takeaway
Dividends are a function of earnings, so apart from a decent yield, you want to make sure that earnings are growing at a steady clip and that the payout ratio is sustainable for the business to grow at its maximum with the retained earnings.
