It is important for investors to realise they should not invest in companies based purely on the dividend they offer. As we have recently seen in the case of Metcash, dividends can be cut or completely stopped when business conditions become difficult. Investors should look for companies that have good growth prospects as well as a solid dividend.
With term deposit rates at historically low levels, income-hungry investors will still look for companies that can offer franked dividends yielding more than 3%. While it would be easy just to buy the big four banks and Telstra, I believe the likelihood of significant growth for these companies is limited. Instead, I have selected three companies that have a positive outlook for growth and also offer a solid dividend.
- FlexiGroup Limited (ASX: FXL) has increased its earnings and dividends consistently for the past five years. The diversified financial services company has strong relationships with some of Australia's biggest retailers and has recently announced its expansion in New Zealand. At the current share price investors will receive a fully franked dividend of over 5%. Flexigroup has forecast mid single-digit growth in FY15 with an expected return to higher growth in FY16. Now may be a good time for those investors who are prepared to hold on to the stock for the medium term and pick up the dividends along the way. With the price-to-earnings ratio of less than 11, I expect any positive news will see the share price rise.
- Ainsworth Game Technology Limited (ASX: AGI) has been one of the best performing stocks in the last five-year period. However, the last 12 months have been difficult for the electronic gaming manufacturer after it became apparent it would not be able to maintain its impressive historical growth rate. The good news for investors is that management is now expecting strong organic revenue and profit growth in FY16. Ainsworth continues to build a strong presence in international markets and will benefit from a lower Australian dollar. The last dividend was fully franked and at the current share price is offering a yield of about 3.6%. The recent fall in the share price may be a good entry point for those investors willing to hold for 12 months and beyond.
- The recent decline in the share price of Retail Food Group Limited (ASX: RFG) may also provide a good opportunity for long-term investors. Retail Food Group is Australia's largest multi-brand franchisor and is also one of the largest roasters and suppliers of coffee. The share price fall was the result of an announced non-cash write-down of underperforming assets as well as an increase in short-term cash costs. While this will impact short-term earnings, the longer-term outlook is still positive. Management has outlined a three-year plan that will see the company expand its operations overseas as well establishing new annuity style revenue streams. Long-term holders should benefit from capital gains if management are successful with their strategy and also pick up a 4% dividend along the way.
Many income-seeking investors often overlook the underlying fundamentals and growth prospects of companies and instead focus on the dividend alone. It is important to choose high quality companies with a positive outlook and a capable management team that will be able to create sustainable earnings growth. Investors then have the best opportunity for wealth creation through capital gains and growing dividends.
