Throughout 2013, income-seeking investors went nuts over big name dividend stocks, seemingly without regard for the medium or long-term prospects of the companies.
In my opinion, that's unlikely to be a successful investment strategy over time. I agree with Motley Fool contributor Andrew Mudie's comments for finding outperforming stocks in 2014: "Investors should be looking for companies with above-average dividend yields that are also leveraged to an improving Australian and world economy."
Similarly investors should be looking for companies which are likely to grow earnings and as a consequence, dividends. Here are three companies expected to benefit from the current economic environment and confidence amongst businesses and consumers.
Greencross Limited (ASX: GXL) is quickly becoming one of my favourite buy ideas for a number of reasons. Firstly, its track record is impeccable – a reflection on its business model – returning some 71% share price growth annually to shareholders in the past five years. Secondly, although it operates on very high earnings multiples, increased market penetration of its veterinary services throughout the country is expected to continue, and earnings are likely to more than triple in the medium term. Despite its current yield falling short of 'average' (it has a dividend of 1.4% fully franked), the payout will increase with earnings.
Next up, Collins Foods Ltd (ASX: CKF) is one stock which will be added to my portfolio in coming months. It manages and controls KFC and Sizzler restaurants throughout Australia and Asia. With a market capitalisation of $181 million, it will grow earnings steadily in coming years as it seeks to refurbish a number of its properties and continues to expand and acquire more stores. It yields 5% fully franked which represents a payout ratio just above 50%.
Another company yielding 5% (although it's an unfranked payout) is Mirvac Group (ASX: MGR). Mirvac has struggled to outperform the index in recent years but posted a strong upward trend in FY13 as investors prepared for the return of the housing sector. Management have targeted an increased payout of 8.8 to 9.0 cents per share in FY14 on earnings of around 12 cents per share – a forecast increase of 11%. Investors could now position themselves for a medium-term investment as the effects of low interest rates and returning confidence take hold.
Foolish takeaway
When investing in any stock, it's important to do your due diligence. Look at the industry headwinds and tailwinds and conduct rigorous analysis on the company's financial position and management's goals. Although these three stocks are likely to grow earnings in coming years, investors should consider their portfolio weighting and risk tolerance before making any investment.
