3 companies that can grow profits and dividends for your portfolio

Credit: Ken Teegardin

With an election now likely in early July, interest rates in Australia are likely to stay the same until then. The Reserve Bank of Australia has rarely raised or dropped interest rates during an election period due to an unwillingness to be seen to be influencing the political debate.

But that will mean that investors are faced with another few months at least of record low interest rates eroding the value of any cash held in the bank. In a low interest rate environment it makes sense to reallocate some cash to dividend-paying shares that can beat low interest rates.

But it also makes sense to seek out those dividend stocks that are also able to grow earnings over the next three to five years. The three stocks on this list fit that bill comfortably.

Retail Food Group Limited (ASX: RFG) started life as a small scale franchisor of doughnut shops, but the company has grown far beyond its humble Gold Coast roots.

Retail Food is now an umbrella group for a range of brands from premium pizza chains to coffee retailers and bakeries. In addition, the company made the clever decision to own the roasting assets for the coffee businesses, which boosts margins and earnings.

The company has substantial room to grow its franchise footprint both in Australia and overseas, with the brands appealing to the mass market and each new franchisee representing a new royalty stream for Retail Food.

After recent share price outperformance, Retail Food Group currently trades with a dividend yield of around 4.3%.

Telstra Corporation Ltd (ASX: TLS) has suffered some share price falls in recent months, but hit the headlines this week for the cash it now has in the bank as a result of its sale of a stake in a Chinese car sales website.

The $2.1 billion windfall means that shareholders can expect additional capital management, either in the form of increased dividend payouts or a large scale share buyback.

In the longer term, Telstra will need to execute a growth strategy to replace the revenue streams earned from the rollout of the NBN and the sale of businesses. Management showed good discipline in withdrawing from a joint venture in the Philippines, when it was not clear that internal return targets could be met.

Telstra will also need a strategy for retaining mobile and internet customers in an increasingly competitive environment where market participants have shown a willingness to cut prices to gain market share – a problem for a company like Telstra which has historically charged a premium for its services.

Telstra currently trades at around a 5.7% yield.

Platinum Asset Management Limited (ASX: PTM) isn’t what most investors would recognise as a dividend stock, but there are several reasons it can be considered one.

Platinum is a fund manager specialising in international stocks and markets. It has an enviable track record, built over decades, largely thanks to the investing philosophy of its founder and major shareholder, Kerr Neilson.

Fund management is a very capital light business model – no large factories, no complex supply chains, and no need for capital intensive research and development. Instead, the major cost is “human capital” through salary and incentives for investment analysts.

Two major factors help Platinum earn higher profits and pay larger dividends: higher funds under management, and performance fees from investing in outperforming stocks. As of March, the company had $24.7 billion under management in its various international funds, with most of its earnings consistently paid to investors as dividends.

Platinum currently trades at a very attractive 5.9% fully franked yield.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. The Motley Fool Australia owns shares of Retail Food Group Limited. 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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