3 future dividend stars

Many investors are drawn to shares with dividend yields that are large today. Shares like Telstra Corporation Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA) come with the promise of a big dividend.

However, I doubt those investors need the income in just the next 12 months. They want the income for two years, five years, ten years or even longer.

That’s why I think it could be a better idea to buy shares of businesses that could generate a lot of income growth. These shares could give decent income in the short-term and big income in the long-term:

WAM Microcap Limited (ASX: WMI)

This is a listed investment company (LIC) that is run by Geoff Wilson and has investment team.

The WAM LICs have built a reputation since the GFC as being high performers whilst paying out a large and increasing stream of fully franked dividends.

Flagship LIC WAM Capital Limited (ASX: WAM) started out life by concentrating at the small end of the ASX, but now it’s too big to effectively do that. WAM Microcap goes back to the ‘roots’ of the WAM philosophy and could generate significant returns over the coming decade, albeit with a lot more volatility because it invests at the small end of the market.

Over the past year its portfolio has generated a return of 28.9% before fees and expenses. It has just started paying a dividend and has a projected grossed-up yield of 4% for FY18. I imagine the dividend per share and yield will grow very nicely over time.

Paragon Care Limited (ASX: PGC)

Paragon is a small cap healthcare business that distributes medical products to healthcare clients like hospitals and aged care facilities.

It has steadily increased its dividend each year over the past five years. It has roughly had a dividend payout ratio of 50% of its earnings during this time, so all the new acquisitions could lead to annualised dividends per share of at least 4 cents in 12 to 18 months.

This could mean the current grossed-up dividend yield of 5.3% turns into a 7% yield at today’s prices.

The dividend could continue to grow as Paragon benefits from the ageing demographics, more acquisitions and economies of scale.

WAM Global Limited (ASX: WGB)

This is the newest LIC offered by Wilson Asset Management. It is taking its market-beating investment process to global shares.

There is a much wider array of shares that WAM Global can invest compared to ASX-only funds. Over the long-term WAM Global could be the best performer in the WAM stable due to the number of different opportunities presented.

It currently doesn’t pay a dividend, but I expect in the years ahead investors at today’s price will be receiving quite a nice dividend yield.

Foolish takeaway

I hope all three of my ideas will outperform the market because I own all three in my portfolio. At the current prices Paragon and WAM Global seem compelling.

WAM Global looks good because it’s trading under its IPO price – Geoff Wilson has bought shares recently. Paragon is only trading at about 12x FY19’s estimated earnings.

Another dividend star of the future is this top ASX share which is the leader in its industry, is expanding to Asia and is likely to increase its dividend by more than 25% in this reporting season – that’s why it’s in my portfolio.

Breaking news: ASX companies set to raise dividends!

It's been a nail-biter of a reporting season here in the first half of 2018.

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Motley Fool contributor Tristan Harrison owns shares of Paragon Care Limited, WAM MICRO FPO, and WAMGLOBAL FPO. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Paragon 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.

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