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5 great ASX income shares that could double their dividends

Dividend shares are often thought of as the retiree’s crutch. Sure, having a passive stream of income hitting your bank account every six months is something no one would have an issue with. But for the big dividend payers like Commonwealth Bank of Australia (ASX: CBA)… let’s just say they don’t seem to be a popular choice for investors looking for maximum capital growth.

But what if you picked up Commonwealth Bank shares fresh out of the Treasury coffers when they floated for $5.40 back in 1991? For one, you would be looking at a 1,420% price gain on today’s share price. But if you had reinvested the growing dividends religiously, your gain would be an order of magnitude higher – in fact, you would be looking at a yield on cost of 80% with CBA’s most recent payout of $4.30 per share.  

This is a classic example of a dividend growth share – an extremely powerful method of selecting shares for future, and not current dividend payouts. Dividend growth shares are easy to spot in hindsight, but somewhat harder in the present.

When looking for dividend growth stocks, the most important metrics I like to compare are the dividend yield and the dividend payout ratio – which represents the percentage of earnings the company is paying out to shareholders. Big dividend payers like Commonwealth Bank usually pay out between 70-100% of their earnings, so if I’m looking for dividend growth, a low payout ratio tells me that the company has the spare room to grow its payout down the road.

So here are 5 ASX shares that I think have the capacity to double their dividend payouts over the next decade, all from different industries for diversity’s sake. I’m not saying they will be the next CommBank, but I do see potential for the dividend trickles to become a flood down the road.

Healthcare: CSL Ltd (ASX: CSL)

Current Dividend Yield: 0.97%

Payout Ratio: 45%

CSL is the best ASX healthcare stock you can publicly buy in my opinion and has the share price appreciation to back it up. CSL is another stock that used to be government-owned, but Prime Minister Paul Keating kicked it out of the nest in 1994 for $2.30 a share (I wonder if he regrets that now). Just three weeks ago, the CSL share price hit a new record high of $242.10 – making this ASX giant a $108 billion company.

CSL has two primary focus areas: vaccinations and blood plasma products and is an R&D world-leader in both. The company also continues to focus on anti-venoms, immunology and other medical work in various fields.

An indication of this company’s quality is well told by recounting the swine flu scare back in 2009. The Federal Government commissioned CSL to manufacture the swine flu vaccine for the entire country – 21 million doses. Fortunately, it turned out that we didn’t need most of them, but if CSL is the government’s go-to company, it says a lot in my opinion.

CSL shares do trade at quite a premium (currently at around 38x earnings), but the company has paid a rising dividend every year since 2013. Currently, CSL shares are offering a 0.97% yield – based on yesterday’s share price and the most recent annual payout of US$1.85 (A$2.65) per share. This gives the company a current payout ratio of 45%. Considering that in 2013, CSL shareholders got a US$1.02 per share payout and the company’s current payout ratio is 45%, I don’t think it’s hard to conceive a doubled dividend in 10 years’ time.

Media: REA Group Ltd (ASX: REA)

Current Dividend Yield: 1.09%

Payout Ratio: 51%

REA is a company of a different breed – its flagship website realestate.com.au dominates the Australian property classifieds and it has used this dominance to insert itself into an expanding portfolio of property-related interests – most recently offering home loans through a joint venture with National Australia Bank Ltd (ASX: NAB). REA’s dominance of its field has been swift and ruthless – the company boasts that people spend almost 4 times longer on its services than its nearest competitor and more than 75 million visit its website every month.

You can see this dominance quantified by looking at the company’s history of earnings growth. In 2014 the company gave its investors $1.126 in (adjusted) earnings per share, but fast forward to 2018 and this number has grown to $2.125 per share – almost doubling in just four years.

Investors have rewarded this performance enthusiastically too. Just this week, the REA share price hit a new all-time high of $110.48, which means that REA is trading for around 140x earnings. Still, you can see why the market is willing to place a premium on this company. Dividends have also grown at a very healthy rate. REA has paid a steady dividend since 2009 and has increased it every year since 2011. In fact, since 2014 the payout has gone up by over 20% each year and last year came in at $1.09 per share – representing a payout ratio of 51% and a yield on the current price of 1.09%. Since this dividend has been growing at such a healthy rate while only representing half of REA’s earnings, I expect it could double in the next five to ten years.

Tech: Altium Limited (ASX: ALU)

Current Dividend Yield: 0.99%

Payout Ratio: 58%

You may know Altium as one of the piping hot WAAAX stocks – the most loved group of tech darlings on the ASX. Altium specialises in providing software that assists engineers to design printed electronic circuit boards (the often-colourful pieces of plastic that most electronic devices have inside them). The company’s leading product is Altium Design – a cloud-based design program that is offered on a Software-as-a-Service (SaaS) subscription basis, which has been wildly popular in the rather niche circuit board design industry.

Just last financial year Altium reported a 13% rise in subscriptions. This in turn has enabled the company to go from booking US $71 million in revenue in 2014 to last years’ US $171.8 million – so this is clearly a high-octane growth stock.

If Altium can maintain its customers within its subscription ecosystem (to borrow an Apple phrase), I expect that it will be able to continue to capitalise on this growth industry and perhaps even dominate it in the future.

But you may not know that Altium also pays a dividend. In 2019, said dividend was 34 cents per share (giving it a 0.99% yield on current prices) – which is looking very nice considering back in 2014 total dividends amounted to 12 cents per share. 2019’s 34 cents per share payout is 26% higher than 2018’s alone. With a payout ratio of 58% together with the rate the company’s revenues are growing, I’m convinced this is another dividend-doubling growth stock in the making.

Financial: Macquarie Group Ltd (ASX: MQG)

Current Dividend Yield: 4.35%

Payout Ratio: 66%

Macquarie is often labelled the ‘fifth bank’ of the ASX, but in reality, traditional banking like credit cards and mortgages makes up a very small portion of this company’s earnings – around 12%. Macquarie’s real powerhouse is its investment banking business which is made up of its Macquarie Capital (MacCap) and Commodities and Global Markets divisions and accounts for around half of Macquarie Group’s earnings.

Another chunk comes from Macquarie’s Asset Management business, which has grown considerably over the past decade and now places Macquarie in the top 50 global asset managers, with $542 billion of funds under management. The company offers both a range of managed funds and other investment vehicles as well as its popular ‘Macquarie Wrap’ investment management platform.

So in comparison with the other big four ASX banks, I think Macquarie has a far superior and diverse earnings model, which has enabled it to return a Compounded Annual Growth Rate (CAGR) in earnings per share of 15% over the past five years and 12% since the company’s public ASX listing in 1996.

For the 2019 financial year, Macquarie posted earnings per share of $8.83 and a full-year dividend of $5.75 per share (which equates to a yield on current prices of 4.35%). This means that in FY19, Macquarie paid out 66% of its earnings as dividends. This is among the higher-yielding shares we are looking at today (with a payout ratio to match), but I think that Macquarie will be able to keep its earnings growing at double digits over the coming years, and its dividend as well (especially considering the dividends have been growing at 17% over the past five years).

Industrial: Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

Current Dividend Yield: 2.68%

Payout Ratio: 57%

Last, but certainly not least is ‘Soul Patts’ – the most loved dividend stock on the ASX. Soul Patts can wear this crown as it is one of only two companies on the ASX that can boast a consistently rising dividend every year going back to 2000 and has been paying a dividend every single year since its ASX listing in 1903.

Not only does it have an impressive dividend history, but it also has an impressive history period, being one of the oldest companies on the ASX. Soul Pattinson was founded way back in 1872 (pre-ASX) and started as a network of chemist/pharmacy stores around Sydney, many of which are still running today. However, Soul Patts is now known for being primarily an investment company – owning shares of other ASX businesses – hence its oft-touted nickname of Australia’s Berkshire Hathaway.

Some of its holdings include

  • a 25.3% stake in TPG Telecom Ltd (ASX: TPM)

  • a 50% stake in New Hope Corporation Limited (ASX: NHC)

  • a 44% holding in Brickworks Ltd (ASX: BKW)

  • a 19.3% share of Australian Pharmaceutical Industries Ltd (ASX: API)

  • an 8.6% stake in BKI Investment Company Ltd (ASX: BKI)

  • plus several others

As you can see, this is a highly diversified company with a strong set of earnings bases to receive dividend income from. Now, Soul Patts might just be the last company on this list you would buy to get rich. Its primary appeal is its defensiveness, consistency and its proud history of dividend income – which it has delivered with a CAGR of 12.3% over the last 19 years. For 2019, the company will pay out 57 cents per share, which gives Soul Patts a payout ratio of around 57% on earnings per share of $1.035 and a current yield of 2.68%. Still, if I was to hold one company for the rest of my days, it would probably be Soul Patts – there are no safer a pair of hands on the ASX.

Foolish Takeaway

All five of these dividend paying companies are ones I would be happy to invest in for dividend growth over the next decade. On their current trajectories, all five have reasonably low payout ratios and are on track to double their dividends over this time, and all five have sufficient growth and scale in their businesses to keep revenue, earnings and profits growing at pleasing rates to boot. Of course, the market knows this already, which is why many of these companies are priced to perfection. But if you wait, there’s likely to be a better buying opportunity at some point in the future – that’s just part of dividend-growth investing.

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Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium and CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Brickworks and REA Group 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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