Lately I find myself writing about dividends a lot. That's partly because I like them, but mostly because I miss them – because my portfolio has shifted away from dividend-paying shares towards more speculative ones.
Today's article is for those investors who still are chasing lucrative yields, and joins recent ones like 3 of the best investments to buy and hold forever, which is my own opinion on the ASX's three best future dividend stocks.
Both companies I have selected are moderately geared, but importantly they both pay less dividends per security than they earn, and have the prospect of growth both organically and through acquisitions.
1) Cromwell Group (ASX: CMW) – 7.4% p.a. paid quarterly, 43% gearing.
Cromwell Group is an Australian property company managing a portfolio worth $3.5 billion, and making its first forays into New Zealand through a 50% stake in NZ unlisted company Oyster Group.
Oyster Group currently manages NZ$650 million worth of property, and in my mind has a better than even chance of growing respectably in the coming years, with New Zealand experiencing a time of strong material prosperity.
The reliable nature of Cromwell's earnings make it likely that the dividend will increase in the future, and according to analyst Morningstar, Cromwell is actually 27% overvalued at present.
This means that if you can get it at anything close to its $0.79 'real' value, you're looking at a real bargain.
However if you are uncomfortable with the high level of gearing, you could look instead to Abacus Property Group (ASX: ABP), below.
2) Abacus Property Group – 6.6% p.a. bi-annually, 27.2% gearing.
Gearing is much lower in Abacus Group, which operates a triple portfolio of Storage, Property (construction and rental) and Funds Management assets.
Abacus owns 49 storage properties, plus 97 investment properties valued at $1.33 billion, and 48 commercial properties valued at $933 million and delivering $42.7 million in EBITDA. Property Ventures (construction and sales) and Funds Management together contributed a further $20 million to EBITDA, although both figures were down on the previous year.
Overall Abacus is a well-diversified property manager with scope for growth as domestic economic conditions improve (particularly employment).
Better yet, its market cap of $1.3 billion means that it is trading at a hefty discount to Net Tangible Assets, which are worth more than $2 billion.
To my mind the main risk of Abacus is that the company's average debt term to maturity is the relatively short 2.3 years. Another risk is the company's intention to use its remaining $220 million financing to acquire more properties.
Presumably Abacus intends to refinance as and when debt comes due; this is fine while interest rates are low but bears peril in a few years when rates are on their way back up again.
However, although Abacus is more aggressive with its debt at 25% gearing and with a large stable of investment properties that could be sold, its ability to repay its debt is extremely high and overall I believe it is less risky than Cromwell.
And if it's less risky earnings you're after – earnings that are almost guaranteed to increase when interest rates rise – why not check out The Motley Fool's free report on our top income stock pick for 2014/2015?
It's a company I already own, and fairly valued given that it flies under the radar of most investors.
Furthermore, its unique business model delivers earnings in boom-times or downturns, and one that could form an important part of your income portfolio.
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