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2 long-term dividend growth shares

Quite a few of the businesses that are ranked as ‘dividend’ shares by investors have already reached full maturity and there is little growth on offer.

So, whilst the dividend yield may be large there is little growth of the dividend and little capital growth over time. I’m thinking of shares like Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS).

Instead, I think it’s a great idea to buy shares of businesses that offer a decent yield now and long-term growth.

Here are two of my favourite ideas in this regard:

Challenger Ltd (ASX: CGF)

Challenger is Australia’s leading annuity company, it provides a guaranteed source of income for a retiree’s capital, sometimes for life.

The share price has fallen to $10.40 before the ASX opened today, which I think is an attractive entry point barring a share market crash.

Challenger’s dividend has steadily increased over the past year, yet after the share price decline the yield is a grossed-up 4.9%.

With new superannuation rules requiring all superannuation funds to offer an option of guaranteed income for life and the number of people over 65 projected to increase by 40% during the next decade it should be quite easy for Challenger to continue to grow the dividend.

It’s currently trading at 15x FY19’s estimated earnings.

InvoCare Limited (ASX: IVC)

Australia and New Zealand’s leading funeral operator has also seen its share price fall substantially from previous highs.

Death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050. This should provide a steady tailwind for InvoCare to grow earnings over the ultra-long-term.

What I particularly like about InvoCare at the moment is that it is heavily investing to update its locations to cater for modern demand. People want to celebrate the person who passed on, not mourn. Therefore, InvoCare are adding more funeral options and making the interiors white instead of dark. This is delivering better results than management had forecast.

Whilst InvoCare has recently slightly cut its half-year dividend, it has been growing over the long-term and I’m fairly confident it will keep growing from next year onwards. It currently offers a grossed-up dividend yield of 5.1%.

InvoCare is currently trading at 22x FY19’s estimated earnings.

Foolish takeaway

Both of the above businesses offer yields of around 5% and also could potentially grow operating earnings per share (EPS) by around 10% per annum in the medium-term if the growth plans are a success.

Another business offering income and growth is this top ASX share that is just expanding into Asia and grew profit by 30% in reporting season.

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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited and InvoCare Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited and Telstra Limited. The Motley Fool Australia has recommended InvoCare 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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