Banks and miners are typically the first ASX dividend stocks that come to mind when hunting for decent yields. However, after a tremendous rally in the Big Four banks, an investment in the likes of Commonwealth Bank of Australia (ASX: CBA) just isn't quite the no-brainer buy it once was.
But what if I knew of a company dishing up more than twice the dividends and a delicious amount of potential capital growth? Sounds like the holy grail of investments, right? Or at least one heck of an opportunity for someone hoping to strike a balance between income and growth.
Don't worry; it's not a figment of my imagination. The company is Smartgroup Corporation Ltd (ASX: SIQ), and despite posting a sensational half-year result in August, shares in this billion-dollar business are down almost 8% this year.
Is this ASX dividend stock really paying a 6% yield?
The short answer is yes. The salary packaging, fleet management, and novated lease provider has paid 49.5 cents per share in dividends in the last year. This works out to be a dividend yield of 6.2% based on the current share price.
There's a longer answer, too.
Part of the 49.5 cents is a special dividend. If we remove the 16 cents attributed to a special payment — which usually means it's a one-off — the yield reduces to 4.2%. Nothing to sneeze at, but a savings account might hand out more.
What's important to know, though, is that Smartgroup has paid this special dividend for four years in a row. It doesn't mean it will be paid again next year, but four years running sets quite the precedent for possibly even cranking up the baseline payment.
It all comes down to profits. If Smartgroup's profits flatline or fall, then there's a slim chance of an increase in dividends. Conversely, if the business can continue to grow, then the income component can also expand.
I'm buying more, and not because of the dividends
This is where it gets exceptionally interesting for Smartgroup. While the ASX stock has dividend credentials, the growth on display is beyond what you might normally expect from a high-yielding investment.
In the latest half-year result, Smartgroup's revenue increased 27% to $148.5 million, and bottom-line profits increased 16% to $34.1 million. Consensus estimates have the company earning in the region of $78 million in FY25.
Today, Smartgroup has a market capitalisation of $1,070 million. If we calculate the forward price-to-earnings (P/E) ratio, it comes out at around 14 times FY25 earnings. That's a fairly low multiple for a company posting decent growth.
If I had to guess, my fair value for this ASX dividend stock would be approximately $10.50 per share. Meanwhile, shares were trading hands at $8.01 at the close yesterday, which means there could be 31% of capital appreciation around the corner.
In saying that, I'm a long-term holder of Smartgroup. While the short term looks extremely compelling, the compounding potential in the long run is even sweeter.
