With interest rates having spent the last handful of years on a downward trend, many income-seeking investors have found life increasingly tough. After all, an interest rate of 2% is historically very low and, while still ahead of inflation of 1.5%, offers little in the way of a real return over the medium term.
Looking ahead, things could get worse before they get better for savers, with the Aussie economy enduring a highly challenging period which is likely to cause the RBA to move to an even looser monetary policy. As such, dividend stocks could fulfil a crucial role over the coming years.
One stock which is not normally viewed as a strong income play is health care company CSL Limited (ASX: CSL). That's because at the present time it yields just 1.8%, while the ASX's yield is 280 points higher at 4.6%.
However, CSL has huge potential to become a very appealing income stock in future years, which is at least partly due to its high growth/low payout ratio offering. In other words, CSL is forecast to grow its bottom line at a rapid rate which, when combined with the fact that it pays out a relatively modest proportion of profit as a dividend, could equate to rapid growth in shareholder payouts.
For example, CSL is forecast to post a rise in its bottom line of 11.9% during the next two years as it begins to integrate the influenza vaccination business which it acquired from Novartis in a deal worth $380m. And, with it making strong progress with new treatments, CSL looks set to continue the run which has seen its earnings soar at an annualised rate of 21.8% during the last decade. This indicates that it offers a degree of stability and also is less highly correlated with the macroeconomic outlook than is the case for most of its index peers. Both of these qualities are major pluses for income-seeking investors.
Meanwhile, CSL currently pays out just 48% of profit as a dividend. Certainly, it needs to invest a chunk of profit in developing new drugs, R&D and also for potential acquisitions. However, as a relatively mature business it could be argued that CSL can afford to pay out a higher proportion of profit to its shareholders in future. And, looking ahead to the next two years, it appears to be doing just that, with dividends per share expected to rise by 15% per annum. This puts CSL on a forward yield of 2.3%.
In addition, CSL is set to benefit from the dovish stance of the RBA since the majority of its earnings are derived from outside of Australia. This means that as interest rates fall, the likely outcome is a weakening Aussie dollar and this has the potential to provide a short-term boost to CSL's top and bottom lines. Moreover, with CSL having a beta of 0.6, it also offers a relatively low volatility shareholder experience in the shorter term, too.
So, while CSL's yield is rather disappointing, it has the potential to become a top-notch income play in the long run.
