Is this the best dividend growth stock on the ASX?

Most income investors might have overlooked Alumina Limited (ASX: AWC) as mining companies are seldom thought of as good dividend payers, but this miner is about to dramatically increase its dividend to a point that will make your eyes water.

Alumina holds a 40% stake in a joint venture (JV) with Alcoa Corp (NYSE: AA), the world’s sixth largest aluminium producer, and will get a windfall from the JV following Alcoa’s fourth quarter earnings announcement.

The good news may not have been enough to keep Alumina in investors’ good books with the stock falling 1.6% in lunch time trade to $2.40, but that won’t worry most investors given that Alumina is up 31.5% over the past 12 months, when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 5.6%.

Alcoa’s bauxite and alumina segments (the parts relevant to the JV with Alumina) saw a 111% surge in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to $668 million.

The robust increase was driven primarily by a higher spot alumina price, although margins are also thought to have improved significantly to hit a record thanks to a more gradual increase in input costs.

Citigroup estimates that the operating margin probably rose to around US$160 per tonne in the second half of 2017 from US$113 a tonne in the first half of the year.

The high margin is unlikely to be sustained as input costs are starting to play catch-up, but this won’t stop Alumina from rewarding shareholders with a big increase in dividends with Citigroup forecasting a whopping 8% dividend yield for the stock in 2018 – and this is before franking credits are added!

This is the type of yield that would put most other income stocks to shame – such as Telstra Corporation Ltd (ASX: TLS), which is expected to cut its dividend, and the Big Four banks that includes the Commonwealth Bank of Australia (ASX: CBA).

What’s more, Citigroup thinks the yield is not only sustainable, but is likely to grow with the broker tipping the dividend yield to rise to 9% in 2019.

This bullish call is influenced by Citigroup’s upbeat forecast for commodity prices, although investors should be aware that Citigroup’s forecast is much more optimistic than consensus.

Nonetheless, as I have written before, the miners are looking increasingly appealing to income-seeking investors thanks to their strong cash generation from resilient commodity prices and aggressive cost cutting over the past few years.

This means investors can expect more capital returns from mining heavyweights like BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and South32 Ltd (ASX: S32) this year.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia owns shares of and has recommended Telstra 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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