The S&P/ASX 200 Index (ASX: XJO) could be a good place to go hunting for income ideas. ASX 200 dividend shares are known for paying higher yields, such as BHP Group Ltd (ASX: BHP) and National Australia Bank Ltd (ASX: NAB).
However, when looking at what type of companies could deliver better total returns, it could be businesses that are growing faster that may be the better picks for long-term income.
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How does that work?
Writing in an article on Livewire, Rob Crookston from Wilsons gave an example by comparing APA Group (ASX: APA) and GPT Group (ASX: GPT).
A decade ago, if an investor had invested $100,000 into both of those ASX 200 dividend shares, they were each paying a yield of around 5.3%, which meant $5,300 of income.
But, while the market yields of both of these ASX shares have stayed largely consistent over that time, APA's earnings and distribution growth mean it'd now be paying $11,200 of income (an 11.2% yield on cost), compared to $6,900 of income from GPT (a 6.9% yield on cost).
APA's share price has grown at a similar rate, over time, as the income has grown. APA's total returns were "significantly" better than GPT.
Crookston wrote:
Over the last decade, the average dividend yield of the ASX 200 is around 4.5%. However, it is worth considering that dividends are paid at the discretion of the company board, not the shareholders. Even profitable companies cut their dividends due to uncertainty, prioritising balance sheet strength over capital returns.
As a result, we believe it is worth focusing on companies that should generate income, regardless of the macro backdrop. These tend to be sustainable, high-quality businesses.
A high-quality, sustainable dividend stock should also grow its dividend as it is likely to have stable, growing earnings and solid fundamentals. Consequently, they are better positioned to weather potential slowdowns or exogenous shocks.
Conversely, some high-dividend yield stocks tend to be lower quality with less flexibility during tougher times. They often carry more debt and devote more cash flow to paying dividends, leading to higher share price volatility during periods of market turmoil.
Which ASX 200 dividend shares could deliver good returns?
After looking at businesses that will pay a decent yield in the next few years, could deliver good dividend growth over the next three years, are expected to deliver earnings growth, have predictable and defensive earnings, have competitive advantages and can benefit from structural tailwinds, a shortlist can be produced.
There were a number of ASX 200 dividend shares that he pointed out, but there weren't that many that are expected to deliver annual growth of at least 10% or more.
SEEK Limited (ASX: SEK) was one of the names, which is a leading online employment marketplace business operating across Asia Pacific and Latin America. It has also been investing in creating products that can connect candidates with job opportunities and help hirers find candidates efficiently.
SEEK's trailing grossed-up dividend yield is around 3%. Over the next three years, Wilsons said that it's expecting a compound annual growth rate (CAGR) of 13% for the dividend.
Carsales.com Ltd (ASX: CAR), another 'classifieds' business, was a pick. It's the largest online automotive, motorcycle and marine classifieds business in Australia. The company has operations across the Asia Pacific region and has interests in leading online automotive classified businesses in Brazil, South Korea, Malaysia, Indonesia, Thailand and Mexico.
Carsales has a trailing grossed-up dividend yield of 3.6%. Over the next three years, Wilsons said that it's expecting a CAGR of 13% for the dividend as well.
Idp Education Ltd (ASX: IEL) was another ASX 200 dividend share that was picked out that could deliver strong dividend growth. It's a company that provides both student placement services and international English language testing.
It has a trailing grossed-up dividend yield of just over 1%. But, three years from now, it could have a yield of 2.4% with an expected CAGR of 37% for the dividend over the next three years.
