Why dividends can help you uncover the best ASX growth stocks
There's a unique cohort of growth stocks that have managed to grow their dividends year-on-year for the past 6-12 years.
Mentioned
KEY POINTS
- Some of the market's best growth stocks like Pro Medicus, Hub24 and Wisetech have all consistently grown their dividends over the past 6-12 years
- The ability to grow both earnings and dividend reflects a commitment to balancing reinvestment for growth, balance sheet preservation and shareholder returns
- While consistent dividend growth is often seen as a positive sign, it doesn't guarantee strong overall performance as companies like Collins Foods, Sonic Healthcare and IPH have also qualified
In my search for ASX-listed dividend aristocrats – companies that have increased their dividend annually for 25 years or more – I discovered a unique cohort of dividend-paying, growth stocks that have outperformed the market.
These companies may not offer high yields of 4-7% typically associated with well-known dividend stocks but they have managed to consistently grow their payouts over the past 6-12 years, underpinned by strong underlying earnings growth.
Growth with dividends
The below table refers to current S&P/ASX 200 members that have increased their nominal dividends year-on-year for at least six years and their 1, 3, 5 and 10 year returns.
I have excluded the four companies (APA Group, AUB Group, Charter Hall and Soul Patts) that are tracking towards dividend aristocrat status.
Ticker | Company | Streak | 1 Year | 3 Year | 5 Year | 10 Year |
|---|---|---|---|---|---|---|
Arena Reit | 12 | 13% | -1% | 47% | 181% | |
Brickworks | 11 | -7% | 0% | 49% | 94% | |
Collins Foods | 10 | -17% | -36% | -19% | 255% | |
Chorus | 9 | 22% | 27% | 72% | 400% | |
Data#3 | 6 | 12% | 51% | 187% | 934% | |
Hub24 | 6 | 68% | 93% | 345% | 5,695% | |
IPH | 10 | -20% | -35% | -32% | NA | |
Northern Star | 10 | 31% | 55% | 34% | 1,007% | |
Netwealth Group | 6 | 43% | 55% | 154% | NA | |
Pro Medicus | 9 | 117% | 166% | 444% | 16,891% | |
Steadfast Group | 11 | -1% | 13% | 50% | 256% | |
Sonic Healthcare | 12 | -15% | -37% | -5% | 51% | |
Technology One | 11 | 43% | 95% | 205% | 617% | |
Wisetech Global | 8 | 88% | 155% | 256% | NA |
Numbers at a glance
Most dominant sectors: Tech and Financials both recorded three stocks
Other sectors: Health Care and Materials both recorded two stocks and Real Estate, Discretionary, Telcos and Industrials all recorded one stock each
Avg 12 month trailing dividend: 2.6%
Highest dividend yield: IPH at 5.8%
Lowest dividend yield: Wisetech Global at 0.13%
Avg 1-year return: 27% (Best: Pro Medicus 117%, Worst: IPH -20%)
Avg 3-year return: 43% (Best: Pro Medicus 166%, Worst: Sonic Healthcare -37%)
Avg 5-year return: 128% (Best: Pro Medicus 444%, Worst: IPH -32%)
Avg 10-year return: 2,398% (Wisetech, Netwealth and IPH have been listed for less than ten years and the average is massively inflated by Pro Medicus +16,891%, Hub24 +5,695% and Northern Star +1,007%) If you omit those three, the average is still an impressive 348%
Key Takeaways
Strategic dividend payments: Several companies including Hub24, Netwealth, Pro Medicus, Technology One and Wisetech yield less than 2% but they do so for strategic reasons:
Attracting investors with dividend mandates – Some funds may only invest in dividend-paying companies. By paying a dividend (even if it is a tiny one), they will attract inflows from certain institutions and funds
Because I can – These fast-growing tech companies have reached critical mass. They're profitable and able to return a small portion of profits back to shareholders while retaining the rest for growth.
Founder-led income – Most of these companies are either founder-led or management owns millions of shares. A small dividend is one way to take money out of the business without offloading shares (e.g. Wisetech might have a 0.13% dividend yield but that still equates to approximately $19 million in dividends for CEO Richard White)
Inverse relationship: Interestingly, lower-yielding stocks like Wisetech, Technology One and Pro Medicus have shown stronger growth and outperformed higher-yielding counterparts such as Arena REIT, Brickworks, IPH and Sonic Healthcare.
Big growth: When examining the more growth-oriented companies on the list, analysts see the potential for significant dividend growth in percentage terms over the near term. Here are a few examples:
Wisetech: Citi forecasts average annual earnings and dividend per share growth of 43.9% and 43.7% respectively over the next three years. Despite the extraordinary dividend growth, the yield will still track around 0.2-0.4%.
Pro Medicus: Macquarie is expecting average annual earnings and dividend growth of 31% and 103% respectively over the next two years. Likewise, the dividend yield will still sit below 1.0%
There are still a few underperformers: While consistent dividend growth is often seen as a positive sign, it doesn't guarantee strong overall performance. Companies like Brickworks, Collins Foods, Sonic Healthcare, and IPH have underperformed across various time frames.
'Aristocrats' at a glance
These are the four ASX-listed companies that have managed to grow their dividends every year, for at least 14 years.
The longest winning streak currently on the ASX is held by Washington H Soul Pattinson, which is on track to deliver 24 consecutive years of ordinary dividend growth.
How do they stand?
Despite the impressive consistency, the average trailing twelve-month dividend yield is only 3.98%, largely propped up by APA Group. The other three average a yield of only 2.75%, not much higher than the 2.6% average from the growth cohort. From a share price performance perspective, they fall short on all time horizons:
1-year average: 9%
3-year average: -4%
5-year average: 55%
10-year average: 152%
Having said that, if we strip out the growth/tech companies from the above cohort (e.g. take out WTC ,TNE, PME, NWL, NST, HUB, DTL) the average returns drop to just:
1-year: -3.2%
3-year: -8.7%
5-year: 25.7%
10-year: 206.2%
Bottom line
A company's ability to pay a growing dividend can serve as a useful indicator for finding growth stocks. For a growth company, offering even a modest dividend can signal a strong balance sheet and cash flow. Importantly, these companies manage to distribute dividends while preserving capital for growth and R&D.
