Why Low-Yielding Shares Can Still Make For Great Income Stocks

Credit: Simon Cunningham

A mistake income investors (investors who, well, invest for income by going for dividend-paying shares) commit often is to focus on a share’s yield.

In doing so, shares which currently have low yields are often discarded. That can be a shame because a share’s current yield at the moment tells us nothing about what’s important here – the future stability and growth of its dividend.

Low-yielding shares can still generate great income for us in the future if they manage to grow their businesses and thus their dividends.

Dividend superstars with low yields

A great case in point would be tourism asset operator Straco Corporation Ltd (SGX: S85). The company got listed in 2004 and paid its maiden annual dividend in 2006 which came up to 0.25 Singapore cents per share.

If you’d bought Straco’s shares eight years ago on 19 March 2007, you’d have paid S$0.135 per share and gotten a historical dividend yield of a meagre 1.85% (based on the total dividend for 2006).

But when 2014 came along with Straco paying a total dividend of 2.0 cents for the year, your yield-on-cost on the March 2007 purchase would have come up to a tasty 14.8%!

Table on yield-on-cost

Source: S&P Capital IQ

Straco’s hardly an isolated case, as we can see in the table above. Shares like Super Group Ltd (SGX: S10), Dairy Farm International Holdings Ltd (SGX: D01), and Sarine Technologies Ltd (SGX: U77) had also produced great yields-on-cost for their investors over the same time period I demonstrated earlier with Straco.

Growing business fueling growing dividends

The growing dividends of the quartet weren’t just magicked out of thin air – they came as a consequence of a growing business.

Table on dividend shares' operating cash flow

Source: S&P Capital IQ

We can see from the table above that the four shares’ growth in dividends have been accompanied by a strong surge in operating cash flow as well.

A Fool’s take

The experience of the quartet above show that shares with low yields currently can still become great income stocks for the future if their businesses – and by extension, dividends – can grow in the years ahead.

So, keep the future growth of a business in mind when you’re out seeking for income, especially if you’d like a nice and growing stream of dividends when you’re older.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Straco Corporation, Super Group, and Sarine Technologies.