Did you know that some investors claim you should never buy shares for income?
While big dividend yields on shares are appealing on face value they can be deceptive to new investors who should be focused on long-term returns.
For example a company paying out nearly all its profits in dividends may offer a high yield today such as Telstra Corporation Ltd (ASX: TLS), but if it pays out all its profits there's no money left over to invest for growth.
In fact if a company's profits fall and costs rise you might find your dividends cut at the same time as the value of your invested capital falls.
As such you should demand at least double the now rising 'risk-free bond rates' (around 3% on US treasuries) in yield as compensation for the significant extra risk you're taking on in buying "dividend-paying" equities like Sydney Airport (ASX: SYD) or Transurban Group (ASX: TCL).
Therefore if you're a share market investor outside the retirement stage, then you should resist the dividend call to focus on growth if you want to generate serious wealth.
This is because companies that pay a small or no dividend as a percentage of earnings and reinvest for growth will produce the strongest returns for investors.
Below I name five companies that fit the bill, which could decimate the returns of traditional dividend favourites in the years ahead.
Bapcor Ltd (ASX: BAP) is the replacement auto parts distributor that is growing organically and by acquisitions. It's projecting profit growth of at least 30% in financial year 2018 and reportedly launched its first stores in Thailand this week. In financial year 2017 the company paid out 13 cents in dividends on earnings of 23 cents, which means it's retaining plenty of cash for growth. The business and stock price are motoring ahead and it might not slow down for a long time yet.
CSL Limited (ASX: CSL) is a blue-chip healthcare business that paid an FX-adjusted dividend of $2.02 per share on earnings of $3.81 over FY 2017. Moreover, the business should deliver profit growth of at least 20% this financial year as its investments in existing and new market-leading healthcare products continue to deliver spectacular returns to investors. Much of the group's spare cash flow is invested in research and development before dividends, with the stock up more than 225% over the past five years.
Flight Centre Travel Group Ltd (ASX: FLT) is the founder-led business that has seen its shares climb from GFC-lows around $6 in 2009 to $63.40 today. In FY 2017 it paid out $1.39 per share in dividends on earnings of $2.32 and it's also a business growing via a mix of global expansion and acquisitions around the world. The global leisure and corporate travel sector remains a growing space, with proven operators like Flight Centre likely to keep on winning.
Facebook Inc. is an overseas pick I'll allow myself to recommend on the basis that it is a market leader still delivering incredible profit growth given its mega-cap status.
In the most recent quarter it grew its profit 63% which is actually slower than prior quarters, but should give you some idea of the momentum it's generating. Much of that growth momentum is coming via its Instagram app, while it's also a market leader in the artificial intelligence and virtual reality space.
The kicker is that the stock only trades for around 28x annualised earnings, which is reasonable given its growth and competitive advantages. Facebook doesn't pay a dividend, but does use its giant cash flows to buy back shares at significant rates, with it currently being in the market for $9 billion worth.
Mercadolibre (NASDAQ: MELI) the Latin American Kogan.com (ASX: KGN) may be unknown to many Australian investors, but this US$14 billion online marketplace selling and delivering discounted goods is wildly popular across large and (sometimes) growing economies like Brazil and Mexico. The stock has tripled in value over the past fours years and it's building the kind of network effects and scale that could deliver serious long-term growth.
