There aren’t many shares on the ASX that I would describe as high quality dividend ideas. Just because a business has a big dividend doesn’t mean it’s a good dividend.
Shares with big dividends are more likely to reduce them and it could also be a sign that the business doesn’t expect much growth because it’s paying out a lot of its profit.
One share that may be underrated as a dividend idea is Ramsay Health Care Limited (ASX: RHC). Here are some of the reasons why:
Dividend investors want a decent starting yield. For me, that means it has to yield at least more than you can get in the bank. The best you can get from a bank at the moment is 3% (or under) and Ramsay’s trailing yield is currently 3.25%, grossed-up. The upcoming 12 months of dividends will very likely be more than that, perhaps offering a yield of around 3.5%.
Some investors may comment that 3.25% or 3.5% isn’t very high. It’s true, those yields aren’t high. However, Ramsay’s payout ratio also has to be taken into consideration with this.
For its recent half-year result, Ramsay only had a payout ratio of 48.5%. This means there’s plenty of room for dividend growth even if earnings stay flat, it’s re-investing for growth. It also means earnings could fall and Ramsay could easily maintain its dividend.
One of the most underrated parts of dividend investing is the growth offered by the shares. If you choose a business that is growing earnings at a good pace then it’s likely capital growth and dividend growth will follow.
Ramsay has increased its dividend every year since 2000 and increased its latest-half year dividend by 8.5%.
Ramsay may have more growth to come because it’s expanding its hospitals and building new ones. The ageing tailwinds of Australia, France and the UK will hopefully drive earnings up over time.
Management have also said they are looking at expanding into North America or China over the next couple of years.
Ramsay is currently trading at 21x FY18’s estimated earnings. I think this is a reasonable price to pay for such a high quality company that has several avenues of growth. It may not have the biggest dividend yield, but I think it’s one of the shares most likely to keep increasing it every year over the next decade.
Another top dividend idea is this exciting stock which just increased its dividend by more than 25%.
It's been a nail-biter of a reporting season here in the first half of 2018.
But the real action, in my opinion, is what companies are doing with dividends.
What does this mean for you? Well there is one stock I've found that could very well turn out to be THE best buy of 2018. And while there's no such thing as a 'sure thing' when it comes to investing - this ripper might come as close as I've ever seen.
Motley Fool contributor Tristan Harrison owns shares of Ramsay Health Care Limited. The Motley Fool Australia has recommended Ramsay Health Care 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.