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Is this the best dividend share on the ASX?

Credit: tenaciousme

Retail Food Group Limited (ASX: RFG) is one of Australia’s largest food outlet businesses with a market capitalisation of $972 million.

Receiving a dividend is a very rewarding part of being a shareholder. It means management are confident enough with the business to pay out a portion of profits to the owners.

There are a lot of dividend-paying businesses out there. Here are a few reasons why Retail Food Group could be one of the best:

Diversified earnings and opportunities

Retail Food Group is a master franchisor of a number of different food outlets including: Gloria Jean’s, Donut King, Crust Pizza and Michel’s Patisserie.

This is an impressive list and shows that management have mitigated risk if one particular brand fails. Retail Food Group is also expanding its outlets overseas where it doesn’t have much of a presence yet. This could boost earnings from its outlet franchising business for a long time to come.

Another side to its business is coffee roasting. It has one of the largest coffee roasting operations in Australia and we all know how much Australians love coffee.

This diverse source of earnings is a very pleasing aspect to the business.

Dividend growth

The key part to delivering dividend growth is profit growth. Management have grown the profit very nicely over the last decade and the dividend has been able to follow.

Retail Food Group has grown its dividend every year since 2007. In its latest results to 31 December 2016 it reported that its payout ratio was 69.5%. This gives plenty of scope for future increases and also can fuel growth in future years.

Dividend yield

The share price is the key variable for the dividend yield, other than the payout ratio.

Retail Food Group shares have fallen by 23% since the start of January 2017. This has boosted the grossed-up dividend yield to 7.6%. There aren’t many growing businesses offering that kind of dividend potential.

Risks

There are risks with every business. Changing consumer habits, the franchisees’ success and the number of outlets will all need to go well for Retail Food Group or the share price could continue to fall.

Foolish takeaway

Retail Food Group is currently trading at 13.6x FY16’s earnings which is quite cheap for a business growing at a rate in the double digits.

There are risks, it could be a good investment as long as investors take the potential pitfalls into account.

For more great dividend ideas you should check out this list of shares.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Retail Food Group Limited. Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia owns shares in 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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