The ASX is full of many great dividend-paying shares. This is somewhat thanks to Australia's dividend imputation system, where there is a tax incentive for investors to receive dividends. However, not all dividend paying shares are created equal.
Where to look
Searching for companies with high dividend yields can lead to shares that are more prone to cut their dividends, or companies which have slower growth rates in their dividend payments. I think the best option is to find ASX companies which may have a lower initial yield, but are growing their payments. And have a bright future to continue to do so. Alternatively looking for companies which will one day pay a dividend can be rewarding also.
Let me explain a little more.
An example
If you had bought shares of Macquarie Group Ltd (ASX: MQG) back in 1996 they would have set you back just $6.59 a piece.
Since then, not only has its share price increased massively but so have Macquarie's dividends. In fact, since listing on the ASX in 1996, Macquarie has grown its dividends by a constant annual growth rate (CAGR) of 13%, paying shareholders a total of $6.10 in partially franked dividends during 2019. This means that if you had held onto Macquarie shares since 1996, your dividend yield on investment today would be 92.5% or nearly 110% grossed up!
Of course banks and financial institutions look likely to cut dividends. However, the calculations above include Macquarie's large dividend cuts during the GFC also, from which it has recovered.
Companies to look for
If we look for ASX companies that currently pay around a 5% dividend yield and can achieve a CAGR of 10%, doing a little maths put us into a time frame of approximately 31 years. What this means is that if you were to purchase an ASX share today which yielded 5%, held it for 31 years (great for younger people planning for retirement) and it managed to grow its dividend by 10% each year, then you would receive you initial investment every year just in dividends. Not to mention your capital growth return over this period.
But there are so many companies out there and finding one or two that can fit the mould is difficult. The most important factor to consider is the company's ability to continue to grow its dividend year after year. Without this, you will likely never reach your initial investment.
You should consider a company's addressable market size, its ability to move into other markets, build new products, acquire businesses, etc. All these can help a company grow over time and continue increasing its dividend payments.
One large S&P/ASX 200 Index (ASX: XJO) company which appears a promising candidate is Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). Soul Patts is an investment conglomerate which pays a conservable dividend yield through return from its investments. At the time of writing, it has a grossed-up yield of 4.75%, close to our 5% assumption, and it has grown its dividend payments at a CAGR of close to 8% over the last 16 years. Also pretty close to our 10% goal. This is a growth rate I believe it has the ability to continue providing.
Assuming this growth rate continues, an investment in Soul Patts today would take just over 44 years to receive a dividend yield on investment of 100%.
Foolish takeaway
Finding a company which has the ability to meet these requirements may be difficult. However I'm willing to bet there will be quite a number of companies which will achieve this 100% yield on investment when we look back in 30 years time. The trick will be holding onto them.
