One of the first mistakes made by investors with a goal of securing a passive income stream from the share market, is to focus on the companies which are paying the biggest dividends today.
Long-term investors shouldn't be so myopic and look only at the 'usual suspects' like the banks, supermarkets and Telstra Corporation Ltd (ASX: TLS). Instead those who can identify growing companies, which have a tendency to return a strong dividend to shareholders, are more likely to get the most bang for their buck over the long term.
When identifying such opportunities, ask yourself the following:
1. Is the company sustainably growing profits?
2. What is its current dividend policy and payout? For Australian investors, preferably the dividend will be fully franked.
3. What is its dividend cover? To get this, simply divide earnings per share by dividends per share.
Three growing dividend stocks to hold for a decade
If you're a long-term investor looking to secure a reliable income stream, you should consider adding these three companies to your portfolio…
1. Cash Converters International Ltd (ASX: CCV) is our premier second-hand good dealer and provider of payday loans. After a setback to earnings last year, Cash Converters is again on track to grow profits strongly. Currently shares trade on a dividend yield of 2.9% fully franked and dividend cover of 2.8 times, which leaves plenty of room for further increases in the medium term.
2. Money3 Corporation Ltd (ASX: MNY) is another rapidly growing finance provider, specialising in micro unsecured and small secured automotive loans. Money3 currently trades on a 3.6% fully franked dividend yield and its payout is covered 1.7 times.
3. Slater & Gordon Limited (ASX: SGH) is already Australia's largest listed law firm. However it is being tipped by analysts to become a much larger and profitable organisation now that it has successfully begun to expand in the UK market. Although its 1.2% fully franked dividend might not seem like much, it is covered 3.9 times and will expand with higher earnings. Indeed, that represents a payout ratio of just 25%.
An even better dividend stock than Slater & Gordon…
