No matter what the state of the wider market, dividends matter. In fact, they can make a huge difference to the long term performance of a portfolio whether the market is rising or falling. For example, in a rising market the reinvestment of dividends means that an investor's exposure to a buoyant ASX increases, which translates into higher capital gains. And, in a falling market, it allows an investor to take advantage of distressed prices to position their portfolio for future growth.
Furthermore, dividends matter even more today because interest rates are on a downward trend, which means that cash balances are barely covering inflation for Aussie savers. Looking ahead, this situation could get worse before it gets better.
Clearly, Ramsay Health Care Limited (ASX: RHC) is not a stock which is well known for its income potential. That's mostly because it presently yields a measly 1.8% (fully franked), which is considerably below the ASX's yield of 4.6%. However, looking ahead, Ramsay is forecast to increase its earnings per share at an annualised rate of 20.8% during the next two years as it continue its expansion via development on brownfield sites as well as the potential for further acquisitions.
And, with the company being expected to pass on the majority of its rising profitability to shareholders via an annualised rise in dividends per share of 15.9% during the next two years, it could be yielding 2.3% in the next financial year.
Of course, this is still 230 basis points behind the ASX's current yield, but Ramsay has an excellent track record of growing shareholder payouts, with them growing by 18.4% per annum during the last five years. And, with a favourable demographic tailwind from an ageing population, Ramsay could be set for continued profit growth over the medium term. In fact, if dividends rise at the same pace in the next five years as they have in the last five years, Ramsay will be yielding 3.9% in 2020 and could continue to post strong dividend growth beyond that.
Moreover, Ramsay offers relative stability during challenging periods for the ASX and the wider economy, with its business being less positively correlated to the wider economy than for most of its index peers. This means that it should be a very resilient and dependable income payer, which is a key consideration for income-seeking investors. And, with Ramsay having a beta of just 0.5, it also offers a less volatile shareholder experience, too.
Despite its stability, dividend growth prospects and earnings uplift potential, Ramsay trades on a price to earnings growth (PEG) ratio of just 1.4, which is the same as that of the ASX. And, while its yield may be disappointing at the present time, this could change over the medium term, which makes it a potential income play – especially for investors who are seeking to diversify away from more cyclical stocks.
