Dividend report card: Insurance Australia Group Ltd and AMP Limited

With interest rates on a seemingly downward spiral, dividends are becoming increasingly important for Aussie investors. Of course, their reinvestment has helped portfolios in previous years when interest rates were much higher, but with returns on cash balances falling and incomes coming under pressure due to the potential for a recession, the income provided by shares is taking on even greater significance.

Two stocks which have higher yields than the ASX at the present time are Insurance Australia Group Ltd (ASX: IAG) and AMP Limited (ASX: AMP). They yield 5.2% and 4.8% respectively (versus 4.6% for the ASX), but their real appeal lies in the potential for strong dividend growth.

In the case of AMP, it is expected to increase dividends per share at an annualised rate of 51.3% during the next two years and this puts it on a forward yield of 5.5%. Despite such a strong rise in shareholder payouts, though, AMP is still expected to have considerable headroom when making its dividend payments. This is evidenced by its dividend coverage ratio being set to remain relatively high at 1.3 in financial year 2016.

A key reason for this is an increase in AMP’s assets under management which, as stated in its recent third quarter update, were 6% higher than in the same period of 2014. Looking ahead, AMP has considerable scope to increase earnings as it seeks to grow its offering in Asia, where the take-up of financial products remains relatively low. And, with efficiency programmes also expected to benefit margins, AMP’s price to earnings growth (PEG) ratio of 0.8 has huge appeal; being lower than the ASX’s PEG ratio of 1.3.

Meanwhile, IAG is expected to deliver flat dividend growth over the next two financial years. This may appear disappointing for income-seeking investors, but in the long run IAG is positioning itself for strong growth, with the company also increasing its exposure to Asia. This appears to be a sound move, since it provides the company with not only improved growth opportunities, but added diversification, too.

With IAG’s integration of the business unit acquired from Wesfarmers also progressing well, it is forecast to increase its bottom line by 6.7% in the current financial year. This puts it on a forward price to earnings (P/E) ratio of just 13.8, which is below the ASX’s P/E ratio of 15.5. Furthermore, efficiency savings and synergies of $230m are set to be realised this year from the recent acquisition which, alongside a new digitisation strategy, mean that IAG looks set to deliver an improved income as well as capital gains over the medium to long term.

Clearly, neither IAG nor AMP has a strong long term track record of dividend growth. In fact, dividends per share have fallen by 4% and 9.1% respectively per annum over the last decade. However, with refreshed strategies, appealing valuations and high yields, they appear to be top notch income plays for the long term.

Despite this, there is another ASX stock that I believe could outperform IAG and AMP.

In fact, it's recently been named as The Motley Fool's Top Dividend Stock For 2015 and could make a real impact on your bottom line as we move through the year. As a result, it's well worth finding out more about it.

Click here to do so - it's completely free and comes without any obligation.

Motley Fool contributor Peter Stephens has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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