A significant proportion of overall stock market returns has historically stemmed from dividends. Thus, I believe it is important to incorporate at least some dividend-paying stocks, LICs or indices into your portfolio, ideally ones with robust cash flow to enable increases above the rate of inflation over time.
It is also important to consider the long-term competitive advantages of the stocks you decide on, as dividends will quickly dry up if a company's cash flow experiences structural damages. Here are two ASX stocks that I think have sufficient tailwinds to ensure a rising stream of dividends over at least the next decade.
Rural Funds Group (ASX: RFF)
Rural Funds Group is a REIT, or real estate investment trust – a company that holds mostly real estate or property assets. Rural Funds specialises in agricultural farmland, including nuts, cattle, vineyards, cotton, and chickens. I like this REIT both for its existing yield and security: future demand for food, wine and clothes is probably one of the safest bets you could make with investing. Add to this Rural Funds' average lease of over 13 years (with written in inflation clauses) and you have a rock-solid dividend payer.
Among Rural Funds' farmland renters are solid ASX companies such as Treasury Wine Estates Ltd (ASX: TWE) and Select Harvests Limited (ASX: SHV). I would be comfortable owning RFF shares knowing that a guaranteed income stemming from these esteemed businesses is rolling through the door every month.
The company's rental structure has enabled Rural Funds to increase its dividend annually since listing in 2014 and is currently sitting on a yield of 4.24%. I have no doubt that this will continue to rise well into the future, making Rural Funds an income stock I would love to have.
Ramsay Health Care Limited (ASX: RHC)
Ramsay Health Care is Australia's largest private hospital operator, with over 220 hospitals across several countries. Its ownership and management of major private hospitals in Australia over the last few decades has underpinned successful expansion both domestically and overseas. This scale has enabled Ramsay to establish a significant pricing advantage with suppliers and health insurance companies, in turn generating strong returns on invested capital.
I can only see demand for Ramsay's services continuing to rise if the company manages to maintain its reputation and quality services in an industry with significant tailwinds. Our ageing population and ever-rising demand for medical services bodes well for the healthcare sector, which has been one of the strongest performers on the ASX over the past decade. Government funding through Medicare will continue to face challenges in the years ahead, and therefore private providers like Ramsay are likely to play an increasingly important role going forward.
Although Ramsay is only yielding 2.33% on current prices, I believe that as it continues to grow this yield will only rise over time.
