S&P/ASX 200 Index (ASX: XJO) shares in the right industry have plenty of re-investment potential to build their business. A side benefit of growing profit is that it can fund higher dividend payments for shareholders.
Investment business Investors Mutual Limited (IML) has outlined some ASX 200 shares that have managed to steadily and significantly grow their dividends over the past decade.
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Why are dividends good?
IML notes that "investors that want regular, long-term income, to avoid drawing down on their capital should look to high-quality industrial companies." IML's Michael O'Neill suggested that while banks and resources aren't typically consistent dividend payers, industrial companies are usually the most consistent over time and offer the best chance of consistent income to "fund your lifestyle, while still growing your initial capital over time."
Why are dividends so important? In Australia, passive income has made up more than half of the returns from ASX 200 shares. O'Neill said:
They're also more reliable than capital growth, are less volatile, and tend to perform better during times of low economic growth. For all these reasons we think dividends are likely to return the lion's share of returns for the next decade, so it's a great time to focus on income and dividends.
There are three things that IML looks for when it comes to dividend consistency: recurring earnings, capable management and re-investing profits for growth.
It's re-investing the profit that Amcor shares and Sonic Healthcare shares have particularly benefited from.
ASX 200 share re-investing kings
IML suggests that sensible management of cash flows and the balance sheet are important, as that enables the business to strategically re-invest profit. O'Neill warned:
Companies that overpay dividends relative to profits or stretch their balance sheet too thin don't have this luxury, and underinvestment will ultimately result in weak earnings growth and / or unsustainable dividends.
Sonic Healthcare Ltd (ASX: SHL)
With Sonic Healthcare shares, the business "consistently retained around 30%" of its earnings to fund growth, whether that's through capital expenditure or acquisitions.
The company hasn't been afraid to do a capital raising every few years for larger, 'company-transforming' acquisitions.
Sonic Healthcare has steadily grown its dividend over the last 30 years, aside from maintaining its dividend for two years in the early 2010s. O'Neill wrote that "it really is an impressive track record of dividend growth."
The ASX 200 share has a stated 'progressive dividend policy'. In the FY23 first-half result, it delivered a 5% increase in the dividend.
Amcor (ASX: AMC)
Amcor's dividend has also been steadily increasing most years over the past decade and a half. IML said that one of the key drivers of this dividend history has been how "it has bolted on other businesses to its core business over the years, in niche or adjacent packaging businesses, to continue to fuel its growth."
The ASX 200 share has reportedly held onto around 30% of its earnings over the years to fund these regular acquisitions.
Amcor has raised capital for two large acquisitions during this dividend streak – Alcan from Rio Tinto Ltd (ASX: RIO) in 2009, and the Bemis acquisition in 2019. O'Neill said that "these acquisitions were very successful, transforming the business and driving further growth."
Its latest quarterly period for the three months to March 2023 saw a 2.1% annual increase in the quarterly dividend.
