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Prior to the election, S&P Global Ratings hinted at the possibility of cutting Australia’s credit rating “if parliamentary gridlock on the budget continues.”  Post election, the agency issued a negative credit watch, lowering its outlook on Australia from stable to negative. 
Should the agency go on to cut our credit rating to AA the current situation is likely to go from bad to worse, particularly for the big banks who rely on a AAA rating to attract foreign investors. We now have multiple analysts weighing in with the opinion the cash rate will fall to 1%.  The head of income and fixed interest at BT Investment Management, Vimal Gor, warns of the possibility of the AUD falling to 40 cents should the “unique combination” of reliance on foreign capital and falling interest rates persist.
In light of all this retail investors are being warned to review their portfolios.  In an effort to squeeze out better returns on their investment dollars a renewed rush toward dividend paying stocks may be in the offing.
Note the point of searching for quality dividend payers is increasing your returns.  The dividend is not nor should it be an end in itself but rather a means towards the end of better returns.  As such many retail investors look for high yielding dividend payers in relatively safe sectors.  While newcomers may be tempted by the lure of very high yielding stocks, informed investors know yield is a function of share price and a stock with a dramatically lower price will see a dramatically higher yield. 
In the search for dividend payers with more realistic yields investors can ignore the issue of total shareholder return, which combines capital appreciation from a rising stock price with dividend income reinvested.
In an ideal world what investors should be looking for is better total shareholder return, not just higher yields. Unfortunately many stocks with growth potential have lower yields as capital is reinvested in growth initiatives rather than paid out to shareholders.  These stocks don’t show up in a screen for high yielding stocks nor do they routinely make the numerous articles on what to look for in dividend payers. 
To make the case for total shareholder return, we have only to compare the historical performance of two dividend payers in the defensive Telecommunications Sector – Telstra Corp Limited (TLS) and TPG Telecom Limited (TPM). The following table compares the current and five year average dividend yield along with three and five year total shareholder return.
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TPG has outperformed because the company had and still has room for growth along with increasing dividend payments.  The difference in the five year dividend growth rate between the two companies is staggering. TPG could grow dividends because earnings were growing handsomely as well.  The five year average earnings growth rate for TPM is 30.4% compared to a paltry 2.0% for Telstra.  What’s more, Telstra’s earnings are expected to grow 3.4% over the next two years while TPG’s growth is expected to be 28.4%, which of course explains the massive difference in the two year dividend growth forecast for the two companies – 28.5% versus 3.2%.
Long time Telstra investors should be pleased with the company’s share price performance since the concerns over the impact of the NBN began to abate about five years ago.  However, over that same period TPG was growing at a rapid clip and outperformed the Telstra share price by close to 500%.  Here is the chart.
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Rather than focus exclusively on dividend yield this comparison suggests an alternative strategy.  Look for dividend payers in lower risk sectors that are growing earnings and dividends together to get higher total returns.  Here are two more Telecommunications stocks that meet most of those criteria.
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Vita Group (VTG) is classified as a retailer but telecommunications equipment is at the forefront of what they sell.  The company began selling mobile phones in its first Fone Zone store which opened on the Gold Coast back in 1995.  Following the explosion in mobile phone demand Fone Zone began to have trouble maintaining inventory.  The company entered into an agreement with Telstra to operate 100 consumer stores and 17 Telstra Business Centers focusing on the enterprise sector. 
Vita Group has other business segments but it is the Telstra connection that drives the company’s revenue.  It is an ideal business model as Telstra has a vested interest in moving its own telecommunications offerings to both consumer and business and as such VTG is spared much of the cost of marketing.  VTG is poised to benefit from expansion via the NBN and plans to increase its Telstra Business Centers to 30.  The stock is somewhat under the radar with only three analysts covering the company – one at Buy; one at Outperform; and one at Hold. The company also offers a variety of telecommunication and electronic accessories and repair service.  
MNF Group (MNF) changed its name from the more descriptive My Net Fone on 20 October of 2015.  The company offers consumers, small to medium businesses, and the corporate and government market voice and data services. The services are internet based and include phone, video, and cloud based phone systems.  Deloitte Technology included the company in its prestigious Fast 50 listing every year from 2008 through 2013.  The Fast 50 recognises companies with the fastest three year revenue growth rate.  MNF listed on the ASX in 2004; reached profitability in 2009 and remained so ever since. The company has paid dividends to its shareholders twice a year since September of 2010. 
The company already operates internationally and recently completed the acquisition of the Telecom New Zealand International (TNZI) global wholesale voice business, based in the US.  Both MNF and VTG have two year earnings growth forecast to enable dividend growth.  MNF is expected to increase earnings 54% while the two year forecast for VTG is 145%. The share price increase for the two over the last five years is impressive.  Here is the chart.
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The total shareholder returns listed do not take franking credits into account.  The return to the investor then could actually be higher depending on the credit and the investor’s tax bracket.  However, franking should not cloud the broader issue – dividend payers that are rapidly growing can afford to keep increasing dividends and thus total shareholder return.
There are two more stocks to look at to reinforce the case for total shareholder return.  Both are in food-related businesses; one in the health niche and the other in the convenience food niche.  The companies are pizza maker Domino’s Pizza Enterprises Limited (DMP) and health supplements for humans and animals provider Blackmores Limited (BKL).  Here is the table for these two companies.
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Because of its lofty P/E (75.6 trailing twelve month) some call Domino’s too expensive while others stay away due to the meager dividend yield.  While the yield may be small dividends have been growing for the last five years and are expected to increase 34.7% over the next two years.  The total return figures justify the decision of investors to get on board in the past, despite high P/E’s. Over the last five years DMP’s highest P/E was 49.6 while the low was 19.39. The current P/E for its sector (Consumer Services) is 16.23. The two year earnings growth forecast for DMP is a very healthy 34.7%.  The stock price took a bit of a dip recently over concerns about rising labor costs but has recovered.
Blackmores Limited (BKL) has also had a stellar run with a very attractive future.  The company offers vitamins and herbal and mineral nutritional supplements.  In late October of 2015 the share price jumped 29% in a single day following the news Blackmores was partnering with Bega Cheese (BGA) to develop a range of nutritional foods, the most important of which is baby formula.  The demand for quality baby formula is booming here and was exploding in China following scandals in that country with milk producers.
The bloom came off the rose a bit in the early months of 2016 when the Chinese government began looking to tighten regulations on online sales of foreign goods, especially in the food sector.  By mid-April some of the new regulations were in place, requiring foreign companies to apply for fresh product registration by 1 January of 2018. The multi-year rise of the stock price of BKL has seen some shaky times so far in 2016. Here is a one year price movement chart for BKL.
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While the share price is still up year over year, it has dropped more than 40% over the last six months. While it may take some time to take some market share from existing suppliers in the Chinese infant formula market, the company’s vitamins and mineral supplements are in high demand there and the demand appears to be growing.  Blackmores recently was added to the ASX 100 index and JP Morgan has a 2016 target price on the stock of $215.  Blackmores currently trades at around $130. 
Blackmores began trading on the ASX back in 1988 while Domino’s went public in 2005.  Investors who began coming on board not because of the dividend yields, but because of the increasing total returns have been very handsomely rewarded.  Here is the chart.  
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