As we hurtle towards 2017, I believe it is time for investors to once again turn their gaze to the long-term growth potential of shares.
For many years, falling interest rates have fuelled significant demand for investment property and shares with big dividend yields. For example, shares of the banks, such as Westpac Banking Corp (ASX: WBC), rallied strongly because they offered far bigger yields than a term deposit. And until recently, Telstra Corporation Ltd (ASX: TLS), with its 6% dividend yield was much the same.
Investors are likely to have either reinvested these dividends in similar stocks or used dividend reinvestment plans to grow their existing share holdings.
However, with interest rates expected to flatten or even rise in the next few years, the demand for high dividend yielding shares has likely run its race. Moreover, rising funding costs and slowing house price growth could hurt bank profits.
That's why I think investors will be smart to complement the dividend income side of their share portfolios with shares that have long-term growth potential. Here are three that I like:
- G8 Education Ltd (ASX: GEM)
Who says you can't have growth and dividends? G8 Education shares look cheap and offer a big yield. More importantly, the company pursues a simple growth strategy of buying high quality child care centres in premium locations. While it is undoubtedly a higher risk proposition than some ASX shares, I think it is worthy of a spot in portfolios.
- Catapult Group International Ltd (ASX: CAT)
Catapult Group provides the technology that is driving professional sporting athletes and coaches to better performance. Specifically, Catapult has developed sports analytics devices and tools that coaches can give to their players to monitor their movements, check for injury and develop strategies. Thanks to some recent acquisitions, the company has made a move into the 'prosumer' and video analytics markets.
- Freedom Foods Group Ltd (ASX: FNP)
Freedom Foods is a manufacturer of allergy friendly foods for Australian and Asian markets. Unfortunately, due to a surge in the share prices of companies with almost anything to do with the Chinese consumer market, Freedom Food shares don't come cheap. However, the company continues to set the bar high for organic and acquisitive growth. If shares fall from today's price, they could be an ideal purchase leading into 2017.
Foolish takeaway
On the global stage, growth shares have performed exceptionally well. But on the ASX, investors appear to have continued to bid up high dividend-yielding shares at the expense of growth.
Given this trend, I think there are better opportunities for investors at the smaller end of town, where the growth potential is untapped.
