How to build a portfolio of growing dividend payments

The promise of higher dividends each year is one of the main attractions of investing. Dividends are ‘solid’ returns, unlike an ever-changing share price. Dividends are a good sign that a company is profitable, growing dividends suggest growing profits.

When you analyse stock markets over various time periods, it is usually the dividends that have provided most of the returns for that index.

One of the most satisfying aspects of dividends is that over time, successful companies pay increasing dividends year after year.

It’s hard to identify which companies are going to pay increasing dividends for the next 10 to 20 years. A good starting point is to look at how successful the company has already been at increasing dividends in the past.

Ramsay Health Care Limited (ASX: RHC) 

Ramsay has increased its dividend every year since 2001, a 15-year streak. If you had bought Ramsay shares in 2001, you would be receiving a gross yield on cost of 96% today.

There is every chance that Ramsay can keep increasing its dividend for a long time to come.

It is expanding its pharmacy network in Australia and is looking to grow in other countries. Ramsay will also be a beneficiary from the aging population. This combined with the fact that the public health system isn’t currently receiving more funding is another boost for its business.

Ramsay is trading at 32x FY16’s earnings with a grossed up dividend yield of 2.27%, Ramsay is by no means cheap. However, it’s a high-quality company that would be a good addition to any portfolio for its potential capital and dividend growth.

InvoCare Limited (ASX: IVC)

The funeral and cemetery operator has grown its dividend every year since 2005 – an 11-year run. If you had bought InvoCare shares in 2005, you’d be receiving a yield on cost of 16.8% today.

InvoCare will likely keep this streak going because of the forecasted death rate, which is expected to keep increasing for the next 18 years.

It’s currently trading at 26x FY16’s earnings with a grossed up dividend yield of 4.29%. InvoCare isn’t cheap either and there may be a cheaper entry points in the future, however it’s worth considering buying now for its long-term prospects.

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

WHSP is one of the oldest companies on the ASX, having been established in 1903 – it’s paid a dividend every year since.

Not including special dividends, WHSP has increased its ordinary dividend every year since 2000.

WHSP is an interesting business, it owns significant stakes in TPG Telecom Ltd (ASX: TPM), Brickworks Limited (ASX: BKW), Australian Pharmaceutical Industries Ltd (ASX: API), BKI Investment Co Ltd (ASX: BKI) and others. Together, these investments have helped WHSP to grow. 

It’s currently trading at 20x FY16’s earnings and has a grossed up dividend yield of 4.64%.

Foolish takeaway

I think any of these companies would make a good addition to the portfolio of investors looking to build a rising stream of dividends. If you can pick them up at a discounted price, then that’s a bonus. Investing in reliable dividend payers as a core part of your portfolio would put any Foolish investor in strong position.

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Motley Fool contributor Tristan Harrison owns shares in InvoCare Limited. 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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