While not a dividend stock, my next purchase will be the biopharmaceutical company CSL Limited (ASX:CSL). My main focus for my forever portfolio is dividend producing stocks that will probably still be growing and paying me an income in 10 years time. So, big blue chip stocks growing slowly but surely each year with a total shareholder return of somewhere close to 10 percent every year (dividends and share price).
CSL is more of a growth stock but the numbers still work for me when I think long term income. So they’re currently paying about 1.2 percent dividends and they’re not franked (so no tax has been paid on the income for investors). Which doesn’t sound good for my dividend leaning stock portfolio as I look for around 5% dividends that are fully franked (30 percent tax has already been paid when you receive the dividends).
But over the last 10 years CSL has increased their dividends by about 17 percent each year. Compare that with a good dividend paying bank like the Commonwealth Bank who have increased their dividends by about 5.5% each year over ten years and you can see how quickly that 17% increase would catch up.
Why I like CSL Shares
Firstly, they have a long track record and there’s a very good chance that they’ll still be around in 10 or 20 years time as people are living longer and requiring more medical support. CSL is a major global player in the blood plasma field, vaccines, pharmaceuticals, and they’re continually investing heavily in research & development.
P/E Ratio: Price / Earnings ratio relates to the stock’s earnings and the share price. If it’s too much higher or lower than other companies in the same sector then I’ll be cautious and investigate more. So CSL is expensive compared to both the general Australian market and the pharma sector but the history and the potential future demand a premium.
CSL’s P/E Ratio is currently 34.63, the Australian market is 16.99, and the pharma sector is 12.36.
Dividend Yield and Franking: The dividend yield of a stock is the amount of profit paid out to investors each year. The franking refers to the amount of tax paid on the dividend (at the Australian company rate). So for my Freedom Fund I look for a company paying a 5% dividend each year and I like it to be 100% fully franked, which means 30 percent tax has already been paid on your dividend income. So, depending on your personal tax rate, you may or may not have to pay tax on this income.
CSL’s Dividend yield is currently 1.2% and they have 0% franking.
Growth: Basically I want everything good growing every year. Steady growth over a long period of time is what I look for. Sure there are growth companies out there growing everything at 50% a year but they can also just as quickly disappear. Here’s some growth numbers for CSL..
10yr | 5yr | 1yr | 2yr Forecast | |
---|---|---|---|---|
Sales | 12.6% | 17.5% | 12.1% | |
Cash Flow | 11.9% | 9.8% | 3.6% | |
Earnings | 13.0% | 15.1% | 22.9% | 18.0% |
Dividends | 17.9% | 19.5% | 19.4% | 7.1% |
Book Value | 6.6% | 6.1% | 19.9% |
Total Shareholder return / Average Annual Rate : If a company has a negative return over a ten year period then I run from it. Ten years makes a pattern in my opinion. My aim for the Freedom Fund investments is to have a 10+ percent return, which includes capital growth and income combined.
CSL’s total annual return is: 1 year 40.1% / 3 years 22% / 5 years 26% / 10 years 16.4%
Conclusion
So although CSL Limited is a growth stock more than a dividend stock I’m still comfortable adding it to my Freedom from Slavery Fund. I intend to own it for a hundred years or until my death, whichever comes first (if CSL does their job properly it’ll be the former happening first). That’s assuming that the company keeps growing all the numbers that make me smile.
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