Ask any seasoned investor and they'll tell you, the best dividends are those which are growing. Companies which can consistently grow earnings are the most likely to reward you with higher dividends as well as capital gains.
For example, investors may be critical of Slater & Gordon Limited (ASX: SGH) because its current dividend yield is only 1.5% fully franked. However, those investors who bought shares in the law firm 24 months ago – when it was trading around $1.47 – would be sitting on capital gains of around 220% and will receive a 4.6% fully franked return this year on their original investment.
Growth stories like Slater & Gordon prove why growth stocks trump income stocks any day of the week. Those of you who bought Commonwealth Bank of Australia (ASX: CBA) shares in May 2000 (when it traded around $22.50) would also realise the potential of buying into growth stocks – CBA will pay a dividend of around $3.90 in 2014.
The good news for those looking to make similar, strategic long-term investments is Slater & Gordon's expansion into the UK market is just beginning. It is approximately five times larger than the Australian market. In addition the firm is also expanding into personal legal services here in Australia and continuing its dominance in the personal injury market. In my opinion, at $4.64 per share, Slater & Gordon is a standout buy.
Another bargain growth stock is RCG Corporation (ASX: RCG). Unlike Slater & Gordon it already pays a big dividend yield which is a testament to its undervaluation. It is a holding company which owns and operates a number of footwear businesses such as The Athletes Foot and Podium Sports. Its RCG Brands business distributes Merrel, Saucony, Cushe, Chaco, CAT (Catepillar) and Sperry Top-Sider brands and apparel to Australian and New Zealand markets.
Its store count is growing and retail conditions are improving which allows investors to expect both earnings growth and bigger payouts in 2014. At $0.76 cents per share, RCG represents good long-term value.
Increasing floor space and returns to shareholders is what most CEOs are paid to do and Donaco International's (ASX: DNA) management has been doing just that. Although it does not pay a dividend, Donaco has recently made a number of strategic investments in its hotel and casino businesses which will grow cash flow and earnings in the near future.
Donaco owns the Lao Cai International Hotel in northern Vietnam (right near the country's border with China) and recently upped its stake in the hotel to 95% following the purchase of an additional 20% from its joint venture partner – the Vietnamese government. The next casino is 450km away.
Since gambling is illegal for Vietnamese citizens the casino targets Chinese and international visitors. Patrons are generally "high rollers" who check-in with more than $100,000 – they make up around 80% of revenue. To add to the benefits of geographical location, there is a new train line in place servicing Kunming to Mengzi (China) – 150 km from Lao Cai City – and a new expressway from Kunming to Lao Cai and another from Hanoi.
In May 2014, the company will complete its upgrades on the hotel taking it from a 3-star 34 room hotel, to a brand new resort complex with 428 hotel rooms. This is expected to boost both the top and bottom lines.
Foolish takeaway
It's important your portfolio always includes a number of growth stocks because time has proven that capital gains are better than dividends. However, I'm a firm believer you can have both and I've bought each of these companies on the expectation they will increase their return to shareholders in coming years. Each are, at least, worthy of a spot on your watchlist.
