While many income investors focus primarily on companies already offering high dividend yields, I think investors like myself who are investing for a retirement that will be decades away should also consider stocks that currently offer lower yields but have a proven history of rapidly growing dividend payouts. That’s a great sign of a healthy business.
One such stock is property portal Rightmove (LSE: RMV), which over the past five years has more than doubled its dividend per share from 25p in 2013 to 54p last year. This massive rise in dividend payouts hasn’t translated to a hefty yield though, since the company’s stock has increased a whopping 126% over the period, far outstripping the meagre 16.2% return from the FTSE 100 over the same time.
But I think income investors with a long investing horizon would do well to consider Rightmove despite its low 1.1% headline yield on offer right now. The main reason I’m bullish is that its business is a cash printing machine. Last year it generated £243.3m in revenue while its dominant market position, asset-light business model, and premium pricing power allowed operating profits to rise to £178.2m, representing operating margins of 73%.
After paying £34.1m in tax, management was able to return substantially all of its profits to shareholders via £49.6m in dividends and £90.8m in share buybacks while still maintaining a healthy net cash position of £25m. Now, Rightmove isn’t cheap at 28 times forward earnings. But I believe this is a premium worth paying for the UK’s dominant property portal that continues to grow sales and profits by double-digits and has huge long-term potential as an income share as management returns ever greater amounts of cash to shareholders.
Another cash generating king
It’s a similar story for Auto Trader (LSE: AUTO), which also runs an asset-light, highly scalable platform connecting buyers and sellers, although the product this time is vehicles. Since going public in early 2015, its stock has appreciated a full 64%, again vastly outpacing the FTSE 100’s anaemic 11% return over the same period.
Since then, the company has increased dividends per share from 1.5 in 2016 to 5.9p last year. But, just like Rightmove, Auto Trader has taken a playbook from American publicly listed companies and is more focused on share buybacks, which last year amounted to £96.2m of cash returned to shareholders on top of the £52.2m paid as dividends.
Looking ahead, I see plenty of scope for shareholder returns to continue growing at a rapid clip as management focusses on margin improvements, as operating margins jumped from 65% to 67% last year, and as it pays down the £338.7m in net debt still on the balance sheet thanks to its previous private equity owners.
Auto Trader isn’t cheap with its shares priced at 22 times forward earnings, but again, I believe this is a price worth paying for a firm that controls its market, is consistently growing profits at a double-digit pace and generates huge amounts of cash.
Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.