It would appear that many investors saving for retirement are overly focussed on yield. While it is understandable that upon moving into the retirement stage of life, an investor may seek out income and safety as a higher priority to growth, in the accumulation phase the focus should be on growing your asset base.
One clever way to think about portfolio structure is to focus on buying stocks which are currently growing at a solid pace but which in future years, as they mature, will have plenty of free cash flow to pay substantial higher dividends. In other words buy growth stocks today which will be income stocks tomorrow!
Here are three companies that appear to have decent growth profiles ahead of them and which in future years could be expected to pay dividends substantially higher than they pay today.
1) Wesfarmers Ltd (ASX: WES) is trading on a forecast FY 2014 fully franked yield of 4.3% which is pretty reasonable. Despite Wesfarmers’ large size – it’s a $48 billion company – there are a number of growth opportunities available for the group. One consensus forecast expects earnings per share (EPS) and dividend growth of approximately 7.5% per annum for the next two years.
2) Sonic Healthcare Limited (ASX: SHL) is forecast to pay a dividend of 68 cents per share (cps) in FY 2014, equating to a yield of 4%. With Sonic forecast to grow EPS and dividends per share by around 13% and 10% per annum respectively over the next two years, long-term investors should enjoy higher income from the stock in the future.
3) Pact Group Holdings Ltd (ASX: PGH) listed via IPO in December last year after offering shares in the packaging firm at $3.80 – the stock is currently trading at $3.40. The prospectus states that Pact Group is expecting to pay out 66.9% of earnings, this suggests Pact is currently trading on an annualised pro forma dividend yield of 5.6%. Like its listed peers Amcor Limited (ASX: AMC) and Orora Ltd (ASX: ORA), growth may not be supercharged but growth prospects are reasonable. EPS growth is forecast (consensus) to be 6% from FY 2014 to FY 2015.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.