As investors we?re on the lookout for shares that will give us the best total return, which is the return from dividends and share price growth combined. Companies such as Challenger Ltd (ASX: CGF) and InvoCare Limited (ASX: IVC) fit the bill.
With ?growth? companies we?re expecting most of our return to come from share price growth alone, such as Bellamy?s Australia Ltd (ASX: BAL) Class Ltd (ASX: CL1) and REA Group Limited (ASX: REA).
There are also ?income? companies where most of the return is from dividends. Of course, a big dividend is only useful…
As investors we’re on the lookout for shares that will give us the best total return, which is the return from dividends and share price growth combined. Companies such as Challenger Ltd (ASX: CGF) and InvoCare Limited (ASX: IVC) fit the bill.
There are also ‘income’ companies where most of the return is from dividends. Of course, a big dividend is only useful if it’s maintained or increased.
Below I’ve outlined three companies that have large dividends, with strong potential to maintain the current payout.
National Australia Bank Ltd. (ASX: NAB) is Australia’s fourth largest bank with a market capitalisation of $73.1 billion. It recently unveiled its full year results where it increased its cash profit by 4.2% to $6.48 billion.
For shareholders, the pleasing thing was that the dividend was maintained at $0.99 cents per share (cps). Compare this to rival bank Australia and New Zealand Banking Group (ASX: ANZ) that cut its dividend by 7%.
The stable dividend means that NAB is currently trading with a grossed up dividend yield of 10.29%. However, it remains to be seen if NAB has to raise any more capital or if the expected apartment crash hurts future profits.
G8 Education Ltd (ASX: GEM) is Australia’s largest childcare group with brands such as Creative Garden, Early Learning Services and Bambino’s. It has acquired a large number of childcare centres in recent years, which has fuelled revenues, profits and dividends.
It has been compared to ABC Learning, suggesting that G8 Education could fail too. However, management seem to be much more prudent with acquisitions so far. There are slimmer pickings available now, so profit growth will have to be driven more by improved profitability in the current portfolio of childcare centres.
G8 Education currently has a grossed up dividend yield of 10.74% and has maintained its dividend for the last eight quarters at 6cps.
Investors should keep an eye on the price G8 Education is paying for new centres, its debt leverage and how much organic growth its centres are creating.
IOOF Holdings Limited (ASX: IFL) is one of Australia’s largest wealth management and administration businesses. Its performance is closely tied to the economic cycle, but so far it has managed to keep increasing its dividend.
In its latest results, IOOF increased its dividend by 3% to 54.5cps. It’s currently trading with a grossed up dividend yield of 9.64%.
Is it time to buy?
Companies with high trailing dividends yields can be risky, particularly if a dividend cut is looming. However, all three of these companies have managed to at least maintain their dividend payouts in recent years.
Out of the above companies, I’d stay away from NAB and IOOF because there’s a chance Australia isn’t that far away from an economic dip and financial companies are usually some of the most affected during rough times, but that could present a great opportunity to buy.
I think G8 Education is a risky investment too, but at least it has been growing profits. The current government seems to want to support the childcare sector and there could be more growth to come if it can keep making good acquisitions. G8 Education is trading at 12.7x FY17’s estimated earnings (source: Commsec), which is attractive combined with the huge dividend yield.
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Motley Fool contributor Tristan Harrison owns shares in Challenger Ltd and InvoCare Limited. The Motley Fool Australia owns shares of Bellamy's Australia and Class Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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