ASX dividend stocks have a very useful ability of being able to pay dividends and grow both the underlying value of the business plus the payout over time. Investing $1,500 a month could turn into $1 million.
There are some ASX shares that have been very generous dividend payers over the last decade, like BHP Group Ltd (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA). But, with how large they are, I don't believe they have enormous capital growth potential.
However, businesses that have more growth potential could be an excellent choice to deliver a steady stream of dividends as well as compound growth in the coming years.
I wouldn't advocate putting all of someone's money into just one business. However, some investments do have a lot of underlying diversification. While there are a number of exchange-traded funds (ETFs) that offer compelling diversification in just one investment, many don't provide good dividend yields.
But, there are a few different ASX dividend stocks that could provide that diversification, good dividends instantly and long-term growth. Today, I'm going to tell you about Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
It's an 'investment conglomerate'. It's like Warren Buffett's Berkshire Hathaway because Soul Pattinson invests in listed businesses and private businesses/assets.
Dividend yield
One of the most important aspects of an ASX dividend stock is the income we're going to get. I like large dividends, but I'm happy to receive a smaller yield if it gives a better chance of dividend growth each year and more re-investment.
Soul Pattinson grew its FY22 full-year dividend by 16.1% to 72 cents. At the current Soul Pattinson share price, that translates into a trailing grossed-up dividend yield of 3.6%.
While dividend growth is not guaranteed, the company has grown its dividend every year since 2000, so I think the future yield-on-cost will be even more compelling.
The dividend is funded by the cash flow that Soul Pattinson receives from its portfolio of investments. As its investments grow profit and pay larger dividends, that means Soul Pattinson can fund higher dividends too.
Long-term growth
Soul Pattinson aims to find resilient investments that it believes can grow both the dividends and capital value over time.
That has resulted in a portfolio of names like TPG Telecom Ltd (ASX: TPG), Brickworks Limited (ASX: BKW), Macquarie Group Ltd (ASX: MQG), as well as private investments like agriculture and an electrical parts business called Ampcontrol.
At the company's annual general meeting (AGM) it said that over the prior 20 years, the ASX dividend stock had delivered an average total shareholder return (TSR) per annum of 12.5%.
Past performance is certainly not a reliable indicator of future performance. However, investing $1,500 per month and achieving an average return per annum of 12.5% would take 18 years to reach a $1 million portfolio. If the returns going forwards are lower than 12.5% per annum then it will take longer to achieve the $1 million goal.
'Revolving diversification'
I think one of the most underrated factors that makes a good investment is longevity.
It seems somewhat inevitable that many companies and technologies are replaced over time. Kodak, Blackberry and IBM are not the giants they used to be.
There are very few companies that we can hold, own forever and likely see good returns.
What I like about ETFs and Soul Pattinson is that their portfolios can change, removing the losers and investing in the current/future winners. I think it's this ability that will help the ASX dividend stock continue to be a solid performer for the next 10 to 20 years.
