If you have a long enough investment time horizon I believe investing in shares which have the potential to grow their dividend significantly in the future is a great way to create a source of income in retirement.
Take for example, Ramsay Health Care Limited (ASX: RHC). The private hospital operator has never been regarded as a dividend share. But had you invested in its shares 10 years ago you might feel very differently.
At that point in time its shares were trading at $11.50 and provided a fully franked 29 cents per share dividend, equating to a 2.5% yield.
This year Ramsay is expected to pay a fully franked 132.3 cents per share dividend. Whilst this is a paltry 2% yield based on today's share price, the yield on cost for those that bought its shares 10 years ago is a massive 11.5%.
Furthermore, companies that have a tendency to pay out the majority of their earnings as dividends could provide long-term shareholders with even more lucrative pay-outs.
An example of this is an investment in Retail Food Group Limited (ASX: RFG). Investing 10 years ago when its shares were priced at $1.36 would provide a staggering fully franked yield on cost of 31.6% this year.
But what about the next 10 years?
Three shares which I believe could be equally successful over the next 10 years are fast-growing telco company Vocus Group Ltd (ASX: VOC), popular retailer Premier Investments Limited (ASX: PMV), and online travel agent Webjet Limited (ASX: WEB).
I think each of these three companies has extremely strong growth prospects and the ability to increase their dividends significantly over the next decade.
Whether or not they turn out to be as successful investments as Ramsay and Retail Food Group, only time will tell. But judging by their performances in the last few years I believe they have a great chance.
