It’s quite hard to find a good combination of growth and dividends. Most ‘dividend’ shares have high yields because they have reached maturity (meaning little future growth), are valued on a lower price/earnings ratio basis and pay out a lot of their profit as dividends.
On the other hand, growth shares offer plenty of long-term growth potential but the higher price/earnings ratio and lower dividend payout ratio means the dividend yield is normally 3% or less.
It’s a conundrum. I think the best way to tackle this is by going for small businesses. They are usually lower valued because they are followed less by investors, analysts and media.
With that in mind, here are two small cap ideas:
Paragon Care Ltd (ASX: PGC)
Paragon Care is a healthcare product supplier of items such as beds, equipment and devices to various clients including hospitals and aged care facilities.
The business can point to useful tailwinds due to increasing total healthcare expenditure every year plus the ageing demographics of Australia. The number of people over 65 is expected to increase by 40%, which should indirectly increase demand for Paragon’s items.
Paragon has roughly maintained a 50% dividend payout ratio of underlying earnings over the past few years. It has increased its dividend each year over the past five years and currently has a grossed-up dividend yield of 6%.
Duxton Water Ltd (ASX: D2O)
Duxton Water is, apparently, the only pure water entitlement listed business in the world. This is a unique investment idea, if that’s the case.
Australia has the most advanced water trading system in the world. Duxton Water owns water entitlements and leases the water to agricultural businesses. It’s a good way to ‘play’ the agricultural sector indirectly.
It is also profiting substantially from the current water drought being faced by regional Australia. There’s only so much fresh water in Australia and across the world.
Over the long-term Duxton shareholders will hopefully gain from water lease income via dividends and the increase in value of the water entitlements.
It’s currently trading with a partially franked grossed-up dividend yield of 4.3%.
I fully believe in both of these business’ long-term futures, which is why I’m invested in both of them for the years ahead. At the current prices I think Paragon is the clear value buy – it’s trading at around 10x FY19’s underlying earnings and with a bigger dividend yield.
Another business offering strong dividend growth and capital growth potential is this top ASX share.
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Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO and Paragon Care 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.