Dividend report card: Macquarie Group Ltd and Scentre Group Ltd

While many investors are celebrating the strong growth posted by the Australian economy in the September quarter, the reality is that interest rates are likely to remain low over the medium term.

Certainly, quarterly GDP growth of 0.9% is ahead of expectations and shows that the risk of a recession has perhaps been overplayed. But, with the Japanese economy moving into recession and China’s economy enduring a slowdown in growth rate, the RBA is unlikely to take any chances and seems set to maintain a loose monetary policy moving forward.

As a result, dividends are likely to remain of high importance for investors in 2016. One stock which offers a strong yield plus high dividend growth potential is Macquarie Group Ltd (ASX: MQG). Its yield of 4.3% may be 30 basis points lower than the ASX’s yield, but with dividends per share forecast to rise at an annualised rate of 10.4% during the next two years, Macquarie’s forward yield stands at 4.9%.

A key reason for such strong dividend growth is the fact that Macquarie’s dividends are due to be covered 1.6 times by profit in the current year, which provides the company with considerable scope to increase them at a rapid rate. However, profitability is also expected to increase at a double-digit rate as Macquarie takes advantage of relatively appealing valuations to focus on an ambitious acquisition strategy which has already seen it purchase an aircraft leasing operation as well as the Esanda dealer finance network from ANZ.

Furthermore, Macquarie also has considerable operations outside of Australia so that if quarterly GDP growth numbers start to deteriorate, its shareholder payouts may be less affected than for many of its index peers. And, with Macquarie trading on a price to earnings (P/E) ratio of 14.9 versus 15.8 for the ASX, an upward rerating is on the cards.

Meanwhile, shopping centre operator Scentre Group Ltd (ASX: SCG) could be set to benefit from an improving Australian economy, with a 3.9% rise in consumer confidence in November showing that its future could be relatively bright. And, with the company having a yield of 5.1% and it being expected to increase dividends per share by an inflation-beating 2.4% per annum during the next two years, it remains a relatively appealing income play.

Looking ahead, Scentre Group is likely to be a relatively stable business in which to invest, with its occupancy rate being 99% or higher in each of the last 20 years. This, plus a gearing ratio of just 35%, indicate that it is likely to be a relatively consistent company, while major future developments including a sizeable redevelopment at Chatswood provide evidence of its growth potential, too.

Furthermore, with Scentre Group trading on a price to book value (P/B) ratio of 1.3, it appears to offer fair value for money. Although the wider ASX has a P/B ratio of 1.2, Scentre seems to be worthy of a premium when its stability and long term consistency are factored in.

Despite this, there is another ASX stock that I believe could outperform Macquarie and Scentre Group.

In fact, it's recently been named as The Motley Fool's Top 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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