If I received an unsolicited email suggesting that I could double my money every 7 to 10 years, I would first check the spelling. Internet fraudsters use appalling grammar.
An email suggesting that I tilt my investments away from mining companies toward dividend-paying stocks is much more likely to attract my attention.
By definition, mining companies own diminishing assets with finite resources. A massive amount of cash generated by those mines has to be directed toward maintaining existing mines and acquiring new ones. The boards of Rio Tinto (ASX: RIO), BHP Billiton (ASX: BHP) and Fortescue Metals Group (ASX: FMG) have recently announced plans to trim capital expenditure, given the uncertain outlook for commodity prices.
The simple get rich scheme
If an investor holds a stock for 10 years, a dividend of 7.2% per annum would be required to double the investment. This falls to 7.2 years if the average annual return is 10%. No capital gain is required to achieve this gain. This is aptly named the Rule of 72.
History has shown that when it comes to building long-term wealth, investors who invest in shares with a sustainable business strategy that pay a steady, growing stream of dividends are usually successful. These companies increase dividends over time, which also tends to lift the share price. Even in a falling market, dividends lend a measure of support to the share price and solace to the investor who is still generating returns.
How can I start doubling my money every 10 years today?
Here are three cheap stocks with sustainable and growing dividends
1. Commonwealth Bank (ASX: CBA)
Many would not describe Commonwealth Bank as a cheap stock. However the company has a habit of exceeding consensus market forecasts for earnings and the February reporting season was no exception. It retains its mantle as Australia's highest-rated bank due to its above-sector returns and its leadership in IT development, and it boasts the number-one position in home lending and retail deposits.
It is a low-risk bank trading with a fully franked dividend yield above 5%. This is not a stock where an attractive dividend yield signals high financial risk. Over time, dividends have consistently increased, which has resulted in an increasing share price. As a consequence, the share price has risen 120% over the last five years.
2. Flexigroup (ASX: FXL)
Flexigroup operates in Australia, New Zealand, and Ireland within a range of industries. Through its network of 11,000 merchants, vendors and retail partners the company has access to four markets. This includes business to business, business to consumer, retail to consumers and online. Services are offered through four business units: Certegy (no interest ever and lay by), Flexirent (lease), Flexi Commercial (Vendor Leasing Programs) and Lombard (credit card and interest free).
The reaction to its recent interim profit release was extremely positive from the investment community, as the company extended its run of double-digit earnings-per-share growth to five years. Despite this, the stock has fallen to $3.57 from above $4.00 prior to the result. In my opinion it has been overlooked while the more exciting capital gain stocks like Carsales.com Limited (ASX: CRZ) and REA Group Limited (ASX: REA) have made spectacular percentage gains.
3. Ardent Leisure (ASX: AAD)
Ardent Leisure caught the market by surprise during the reporting season with strong earnings momentum, causing several upgrades to earnings. Broker Macquarie Equities likes the performance of the Main Event family entertainment centres, which provides exposure to a U.S. recovery and translation benefits from a lower Aussie dollar. The Gold Coast theme parks are also expected to benefit from increasing local and international visitors.
Foolish takeaway
In my opinion, all three of these stocks would sit comfortably in a medium-to-long-term portfolio.
Their sustainable and increasing dividends over time could potentially get you started on a slow but steady path to wealth.
