While the RBA decided to maintain interest rates at 2% earlier this week, the demand among investors for dividend stocks is unlikely to dissipate. That's because an interest rate of 2% is exceptionally low and, while it is ahead of inflation of 1.5% at the present time, there is a threat that inflation could overtake interest rates over the medium term. As such, a number of Aussie investors could find that their cash balances fail to produce positive real terms returns in 2016 and beyond.
That's especially the case since the RBA may need to move rates even lower, since the Aussie economy continues to struggle from low commodity prices and relatively high levels of unemployment. Therefore, demand for income-producing assets, such as high-yield shares, could be about to rise.
Of course, two prime dividend paying stocks are Wesfarmers Ltd (ASX: WES) and Transurban Group (ASX: TCL). They currently offer dividend yields of 4.6% and 3.7% respectively which, on the face of it, may lead investors to select Wesfarmers as the more preferable dividend play. However, with Wesfarmers enduring a challenging period in the supermarket sector, Transurban appears to offer superior dividend growth prospects.
In fact, Transurban's recent M&A activity is expected to hugely benefit the company's bottom line, with it forecast to rise at an annualised rate of almost 30% between financial year 2014 and financial year 2016. As well as having the potential to positively catalyse investor sentiment in the stock, such strong growth in earnings means that Transurban is expected to increase dividends per share by 12% per annum during the same timeframe. This means that Transurban's yield is due to be 4.4% in financial year 2016, with clear scope to move higher in future years as a result of improving profitability.
The same, though, cannot be said for Wesfarmers. It may be a conglomerate, but the increasing popularity of no-frills rivals such as Aldi and Costco in the supermarket sector is likely to cause its margins to come under pressure. As a result, dividend growth is unlikely to match that of Transurban over the medium term, with Wesfarmers being expected to grow shareholder payouts by 2.5% per annum during the next two years.
Meanwhile, Transurban's excellent growth prospects mean that it has a relatively appealing price to earnings growth (PEG) ratio of 1.2. This is lower than the ASX's PEG ratio of 1.34 and considerably more appealing than Wesfarmers' PEG ratio of 3.12. As a result, Transurban appears to offer considerably more upside than Wesfarmers – especially since it is not suffering from such a major shift in what remains a key market for Wesfarmers. And, while Transurban's yield may be lower during the next couple of years, its longer term dividend growth prospects are very bright, which makes it the preferred option for long term income-seeking investors.
