Despite posting a strong recovery in the months following the global financial crisis, the ASX has disappointed in recent years. In fact, since the start of 2010 it has risen by just 15%, which works out as an annualised rate of less than 2.5%.
Looking ahead, it would be unsurprising if the ASX continued to struggle. After all, the Australian economy is likely to flirt with recession in the coming months and, with the Chinese growth rate also coming under pressure, the returns on stocks could be rather less than investors were hoping for in the short run.
This, then, means that dividends may take on even greater importance moving forward – especially since the RBA seems likely to attempt further stimulus of the economy via a reduction in interest rates. This, of course, will mean that savers are punished even further and that dividend-paying stocks are required to fill the void left by low returns on savings.
Two stocks with relatively high yields are packaging company Amcor Limited (ASX: AMC) and lending specialist FlexiGroup Limited (ASX: FXL). They yield 4.1% and 7% respectively and, looking ahead, are forecast to grow dividends at an annualised rate of 6.5% and 3.6% respectively during the next two years, which is likely to equate to a real-terms rise in shareholder payouts.
Furthermore, Amcor is well placed to benefit from a falling interest rate, since a large proportion of its revenue is derived from outside of Australia. This means that its earnings are likely to gain a short-term boost from favourable exchange rates and this could help to push its earnings forecasts for the 2017 financial year higher, with growth of over 6% already being pencilled in.
In addition, Amcor is continuing to engage in M&A activity, with the focus being on increasing its exposure to fast-growing markets such as in South America with the purchase of Souza Cruz tobacco packaging operations. And, with the company's dividends being covered 1.4x by profit and Amcor having a track record of having increased dividends per share by 6.7% per annum during the last 10 years, it appears to be a sound income play for the long term.
Similarly, FlexiGroup is also rumoured to be considering M&A activity of its own, with the purchase of Fisher & Paykel Finance a potential option for the company as it seeks to bolster its exposure to the New Zealand economy. And, while a struggling Australian economy would be likely to hurt the company's future outlook as demand for loans falls, FlexiGroup's current price to earnings (P/E) ratio of 8.5 appears to include a sufficiently wide margin of safety while the ASX trades on a P/E ratio of 15.9.
Furthermore, FlexiGroup is due to increase its bottom line by 3.4% per annum during the next two years, which means that in financial year 2017 dividends are expected to be covered 1.7x by profit. This provides it with sufficient headroom to continue to increase shareholder payouts even if earnings growth comes under pressure, thereby making FlexiGroup an appealing income play for the long run.
