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2 dividend stars of the future

Investors are often drawn to shares that offer big yields straight away. However, that may not always be the best strategy.

Big yields would suggest that company is paying out a lot of its profit. This isn’t necessarily a bad thing for an investment manager, but it could be bad for a company because it isn’t keeping much of they money to re-invest back into the business.

Instead, a better strategy could be to invest in shares that could grow the dividend significantly into the future. They may be providing a better yield-on-cost in five years’ time and deliver much stronger capital growth.

Here are two that could fit the bill:

WAM Microcap Limited (ASX: WMI)

WAM Microcap is the WAM listed investment company (LIC) that focuses on the smallest end of the Australian share market. It looks to invest in industrial companies that have a market capitalisation of under $300 million at the time of acquisition.

Some readers may think this a risky strategy, but this goes back to the to earlier days of WAM Capital Limited (ASX: WAM) when it was able to invest in smaller shares and generate a bit better returns. Since inception in June 2017, the WAM Microcap portfolio has returned 23.6% before fees. I wouldn’t expect that every year, but it shows the team can identify good targets.

It has just started paying a dividend and will very likely grow the half-yearly dividend nicely in time. If it repeats the dividend at the annual result, it currently has a grossed-up dividend yield of 4%.

MNF Group Ltd (ASX: MNF)

MNF Group is supposedly one of the world’s leading Voice over Internet Protocol companies. It offers voice services to Skype and Uber, among many others.

The company has been growing at an impressive rate over the last several years. In the latest half-year report alone it revealed revenue growth of 28%, it grew gross margins and showed earnings per share (EPS) growth of 16%.

The market didn’t seem to like the idea of the company launching Pennytel, a brand targeting the over 50s market. It described this market segment as an underserved, high value vertical with significant future growth. MNF is using its own technology and partnerships to launch it. MNF thinks Pennytel can be earnings before interest, tax, depreciation and amortisation (EBITDA) positive by FY19.

MNF has been steadily increasing the dividend over the last few years, it nearly doubled between FY14 and FY17. In the half-year result it increased the dividend by 15%. The grossed-up yield is currently sitting at 2.5%.

Foolish takeaway

I believe both businesses will provide pleasing total shareholder returns and a nicely-growing dividend over the coming years.

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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended MNF 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 Scott Phillips.

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