Why the dividend growth of REA Group Limited trumps today’s yield

Credit: GotCredit

The official cash rate (OCR), as expressed by the Reserve Bank of Australia, last peaked at 17% back in January 1990 and has trended downward ever since.

In the last five years alone, the OCR has continued its precipitous fall from 4.75% to, now, a miserly 2% with continued falls in rates expected, especially if the Australian dollar continues to stubbornly trade above where Governor Glenn Stevens would like.

Naturally, Australian retail banks have followed suit and dropped their own deposit rates to at least match the fall in the OCR.

It’s understandable then that income-seeking investors, especially retirees, have looked for yield alternatives amongst businesses traded on the ASX.

One such example is Telstra Corporation Ltd (ASX: TLS).

Whilst the dividends have grown from 28 cents five years ago to 31 cents today, the share price has risen from $2.89 to $5.24 in the same period (a capital gain of 12.6% per annum compound for those who got in early) demonstrating clearly, in my opinion, an irrational optimism in Telstra’s share price that isn’t backed by the company’s economic performance (the earnings per share, for example, have risen only 5.7% per annum compound over the same period).

Telstra’s dividend per share growth then, over the last 5 financial years, is summarised below:

Dividends (cents) Dividend growth (%)
2010-11 28.0
2011-12 28.0 0.0
2012-13 28.0 0.0
2013-14 28.5 1.8
2014-15 30.0 5.3
2015-16 31.0 3.3

Given the pessimistic forecasts for Telstra’s EPS growth in the next year or so, it might be timely to consider stocks that represent growing businesses with growing earnings per share and, hence, growing dividends.

Whilst I acknowledge that past performance is no guarantee of future investment success, two businesses for consideration as a part of a widely-diversified portfolio, which have demonstrated solid (fully-franked) dividend growth include TPG Telecom Ltd (ASX: TPM) and REA Group Limited (ASX: REA).

An investor buying TPG Telecom on 30 June 2011 would have collected a 2.9% dividend yield (back when the OCR was around 4.75%), but today is receiving 13 cents per share. As a proportion of the original purchase price of around $1.69, that’s a handy 7.7% yield, thanks in no small part to a dividend that has grown by over 200% over five years.

Similarly with REA Group, a growth in the dividend of almost 200% over the last five years has meant a starting yield of 2.3% is today a yield of 6.4% on an original purchase price of $11.90.

It’s no accident too that both TPG Telecom and REA Group have been stellar sharemarket performers over the last five years.

Foolish takeaway

If you’re interested in yield, it might be best to dig a little deeper and check that you’re investing in a growing business. One that can grow its earnings per share should hopefully mean the dividends will follow a similar growth trajectory.

You’ll also need to give your investment time.

As Warren Buffett, Chairman and CEO of Berkshire Hathaway Inc once said:

Someone is sitting in the shade today because someone planted a tree a long time ago.

Buy quality at a reasonable price, and then let your business run. If you can hold your investment for at least 3-5 years, you’ll be giving yourself every chance of not having to worry yourself sick where you’ll be getting your income.

Maybe then, you’ll be able to kick back and live, comfortably, under the proverbial tree that Mr Buffett was talking about.


New Potentially Life-Changing Share Picks Just Released

The Motley Fool's renowned dividend investing guru recently revealed his newest dividend buy recommendation and short list of 3 Best Dividend Buys Now. Which means if you're reading this message right now, you're not on the list to uncover their names before they potentially go gangbusters. Simply click here to learn more about these shares.

Motley Fool contributor Edward Vesely has no position in any stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.