On the face of it, Commonwealth Bank of Australia's (ASX: CBA) 5% fully franked dividend is a no-brainer – but for investors who are looking to build an attractive income stream over time, there are plenty of better prospects out there, with smaller dividends.
Wait…what?
Yes, sometimes it can make more sense to buy a company with a smaller dividend, if that company is growing its dividend rapidly. If you'd bought shares in Woolworths Limited (ASX: WOW) when it was small, your annual dividend today equates to about 50% of your original purchase price in the 1990s – which just goes to show what long-term growth can do for patient shareholders.
Here are 3 companies that could deliver much larger dividends over time:
Pro Medicus Limited (ASX: PME)
This medical software company currently pays a 0.6% dividend yield; worse than a term deposit. Yet it has been growing dividends at a respectable clip, with annual dividends doubling between 2012 and 2016. With the company still early in its growth phase and plenty of opportunities for selling its best-in-class software, Pro Medicus is one growth and dividend company that could be worth a closer look.
Medical Developments International Ltd (ASX: MVP)
Medical Developments is a drug developer behind Penthrox, a non-addictive opiate alternative that has been gaining regulatory approval throughout Europe in recent times. With a combination of a) sales in new markets, b) increasing acceptance of the drug as an effective alternative, and c) expanding its indications of use (i.e., gain approval for use in more situations), Medical Developments potentially has a long growth runway ahead of it. Today's 0.8% dividend could become much larger in time.
Paragon Care Ltd (ASX: PGC)
Paragon Care is a small medical device distributor in a fragmented industry that appears to be growing through a mix of organic growth and acquisition. Since announcing its maiden dividend in 2013, Paragon's dividend has more than doubled in size, and it is still only a small player. While I wouldn't expect future growth to be as rapid as in recent years, Paragon's 3.3% dividend could still become significantly larger over the next decade.
