Although Australia's third-quarter GDP figure came in higher than most economists predicted, the majority of analysts and economists are still predicting at least one more RBA interest rate cut in 2016.
This means investors looking to generate a decent return on their capital will have to move away from cash and into riskier assets like shares and property.
So what type of shares should investors be looking at?
I think investors should look for companies that will have the ability to raise their dividends by growing their earnings over the next three to five years. That might seem like a long time-frame to some investors, but interest rates are likely to stay at these historically low rates for a number of years.
It is also important to look for companies that don't pay-out all of their earnings in dividends as retained earnings are an important source of capital to fund growth.
So with those points in mind, here are three shares that have the potential to raise their dividends over the next few years:
Retail Food Group Limited (ASX: RFG)
Investors looking for a combination of growth and income should definitely consider Retail Food Group. Only yesterday, the company re-affirmed its FY16 profit guidance for around $66 million – an increase of around 20% from the previous year. This has analysts forecasting a full year dividend of 30 cents per share (a 30% increase from FY15) for a current dividend yield of 5.5%. What has me really excited, however, is the chart below:
If Retail Food Group is successful in meeting its new outlet commissionings over the next two years, investors should expect to see a jump in earnings and a simultaneous increase in dividends.
IPH Ltd (ASX: IPH)
For investors unfamiliar with the company, IPH operates in the high-margin, annuity style area of intellectual property (IP) law. The company is expanding rapidly throughout the Asia Pacific and has a presence in 25 countries in the region. Although the company only has a short track record as a listed company, it has delivered impressive growth results so far. Analysts are forecasting double-digit earnings growth over the next couple of years and this should see its dividend progressively increase. According to CommSec, IPH's FY16 dividend should come in around 23.4 cents per share which would provide investors with a yield of around 3.4% if purchased today.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
Investors looking for a reliable and defensive income stock should have Washington H. Soul Pattinson at the top of their list. It might not be the most exciting company on the ASX, but investors who own the shares will be able to sleep soundly at night knowing they are invested with one of the most consistent performers on the market. Washington H. Soul Pattinson has a brilliant track record of outperforming the broader market and increasing dividends for shareholders. In fact, the company has increased its dividends at a compound annual growth rate (CAGR) of 11.3% p.a. over the last 15 years and this is highlighted below:
Although the growth of the company's dividend has slowed in recent years, it is still forecast to increase over the next two years as a result of higher dividends being paid from the growing companies it invests in. At the current share price of $16, investors can expect to receive a fully franked dividend yield of 3.3% for the next 12 months.
Foolish takeaway
As investors have seen in the mining and mining services sectors, a high dividend yield at one point in time means nothing if the company's dividend is not sustainable. Investors should always consider the underlying fundamentals of the business and how the company will actually be able to grow its dividends in the future.
