I recently wrote an article asking why there are no dividend aristocrats in Australia.

A dividend aristocrat is a US coined term that denotes a company that has raised dividends for the last 25 years. Not content with dabbling among the aristocrats? Perhaps the dividend kings are more your speed. Those are companies that have raised dividends for the last 50 years.

I used this observation of a lack of Australian dividend aristocrats to focus on the role that dividend growth plays in an income investor’s portfolio. I’ve long argued that income investors need to balance income growth and current yield in a portfolio. It is understandable that income investors gravitate towards the highest yield shares. But this approach can be short-sighted.

Many non-retired income investors would benefit from a focus on the future income streams that can be generated. Growing income faster than inflation is the pathway to financial independence as purchasing power increases over time. Retirees also need to focus on growth. Retirement may last decades and growth is needed to sustain - and ideally increase – your standard of living.

In the spirit of trying to help investors solve this challenge of balancing high yields and growth I’ve put together a list of shares and ETFs. I may write about investing for a living, but I also invest for my own future and invest for my retired mother. This is the approach I take.

I’ve come up with shares and ETFs that I grouped into two categories:

  1. Shares and ETFs with higher current yields and lower expected growth
  2. Shares and ETFs with lower current yields and higher expected growth

For the shares and ETFs with higher current yields, I’ve come up with a target of 8% annual income growth over the next 5 years. For the shares and ETFs with lower current yields, I’ve come up with a target of 10% annual income growth over the next 5 years.

A portfolio with a mix of both will more than double purchasing power over the current inflation rate of 4.1% in Australia. An investor will do even better if the RBA gets inflation back to the target range of 2 to 3% annually. Growth in income of 8% over 5 years assuming inflation is 3% would increase purchasing power close to 27% in inflation adjusted terms.

Some are domestic shares and ETFs and some are global shares. I have not included the benefit of franking credits in Australia which will provide a further boost to the income for local investors. I’ve assumed that income is reinvested over the 5-year period but also showed the growth rates for investors currently spending the income generated.

As always, these are shares and ETFs that I think are attractive given my own circumstances and you should only consider them if they meet yours. I’ve outlined why I think these shares are ETFs are attractive and have disclosed if I own any of the securities mentioned.

Where to start

I’ve long proposed that every investor should have an investment strategy that sets criteria for selecting investments for their portfolio. I believe the structure of formally documenting investment criteria significantly contributes to achieving investment objectives.

I am interested in generating a sustainable and growing income stream. We can break down each of these components of my investment approach into criteria I use to select investments:

Income: This is simple. I want investments that generate income. This eliminates anything that doesn’t generate income. The yield of my portfolio should be higher than the overall market. If not, I would just buy the index.

Sustainable: Sustainability of income is more complicated. But we can walk through some specific attributes. I don’t want a company whose earnings could fall significantly because they may not be able to maintain a dividend. That eliminates cyclical companies and companies that do not have moats and may succumb to competition over time. I want companies with medium or low Uncertainty Ratings. The Morningstar Uncertainty Rating assesses financial strength and business risk. Strong finances and low business risk are both positively correlated with a company’s ability to maintain dividends over time. I also want a lower payout rate which represents the amount of earnings paid out in dividends. I avoid excessively high payout rates that approach 100%. A high payout rate means that a drop in earnings could put the dividend in jeopardy as earnings may not be able to cover the payments to investors. I tend to buy larger companies that are well established with a diverse set of products and services. That provides more predictability of future outcomes.

Growth: Companies with growing dividends also need to grow earnings. It is impossible to predict the future but moats or sustainable competitive advantages play a role here. Holding competition at bay gives the company the ability to protect market share.

I am going to start with growth. Part 2 of this article will focus on higher current yields.

7 attractive opportunities to grow income

VanEck Australian Equal Wt ETF (ASX: MVW)

This ETF provides equal weighted exposure to ~80 of the largest shares in Australia. The Australian market is top heavy with ~46% of the ASX 300 in the top 10 largest holdings. The equal weighted nature of MVW results in an average market capitalisation of less than half the ASX 300.

The hypothesis of selecting MVW over a market capitalisation weighted index like the ASX 300 is that the largest Australian companies will not grow their dividends as fast as mid-cap shares. There are several reasons why I believe this hypothesis will play out.

The overall dividend payments for the ASX 300 are concentrated in a small number of shares. For example, BHP makes up almost 17% of the total income of the index. The big four banks also play a major role in the current income of the index. I don’t view the dividend growth prospects of the big four banks and the largest miners as favourably as the mid-cap companies which are more represented in MVW.

The banking sector in Australia has coalesced into an operating environment where 4 banks control 75% of market share. It is hard to imagine a scenario where this collective market share would increase. Even if this was possible it is unlikely that regulatory authorities would allow it.

Each of the big four has structural competitive advantages that prevents smaller banks from meaningfully increasing market share. But these same competitive advantages limit relative market share gains for CBA, Westpac, ANZ and NAB. None of them have provided adept at global expansion. I see them as collectively stuck in a holding pattern where growth will be limited to overall loan volume growth in a heavily leveraged domestic market.

The other big component of the local market is the miners. I just don’t love the business from a dividend perspective. Dividends will wax and wane based on resource pricing and where we are in the capital cycle as heavy expenditures are needed to maintain and expand production. Like the banks I’m not enthusiastic about their prospects for long-term income growth at a rate that significantly exceeds inflation.

The prospects for higher income growth from an equal weighted index has played out historically. We can compare MVW to Vanguard Australian Shares ETF (ASX: VAS) to illustrate the impact an equal weighted approach has had on income growth.

In 2023 VAS paid total distributions of $3.47 which given the current price of $95.82 results in a trailing yield of 3.62%. In 2023 MVW paid total distributions of $1.29 which equates to a trailing yield of 3.61% based on the current share price of $36.06. It should be noted that in 2023 the franking credit of 76% for VAS was higher than the 63.5% for MVW.

When looking at the historic compound annual growth rate (CAGR) of distributions MVW has distinguished itself. Since 2015 the distribution CAGR for MVW has been 10.62%. Over the same time period VAS has had a distribution CAGR of just 1.15%.

I currently hold MVW in my portfolio.

Aurizon (ASX: AZJ)

Aurizon operates rail haulage of coal, iron ore, and freight, and owns a regulated rail network in Queensland. It has been a tough run from a dividend growth perspective with a meaningful drop since 2021 as the dividend dipped from $0.29 to $0.15. This is the last thing I like to see but the future looks more positive.

The company has many of the attributes that I look for in a share. It has a narrow economic moat and low levels of business risk as indicated by a Medium Uncertainty rating. The cyclical nature of the commodities hauled by the rail lines are somewhat blunted by the regulated Queensland rail network and the take or pay contracts that require shippers under contract to pay even if capacity isn’t used.

The dividend payout ratio has consistently been higher than 90% which is generally higher than what I would look for in an income growth share. However, based on the predictable nature of revenue for the business I’m comfortable with the higher payout ratio.

Many of the headwinds the company has faced recently should subside. Coal exports from Australia have been weak due to heavy rain in recent years but volumes are increasing.

Morningstar expects continued strong demand from Asian customers to drive export volume.

China's coal usage continues to rise. Due to flat internal production and quality issues, import volumes soared 62% in 2023. And 2024 is also likely to be strong. Our analyst also believes the demand outlook is positive in India and Southeast Asia.

I considered how comfortable I was investing in a company exposed to coal in a world focused on lowering carbon emmissons. But ultimately, I decided that despite best intentions there is no feasible way to reduce coal usage in the near-term. Australian coal remains some of the highest quality in the world and is competitive from a pricing standpoint. There should be a strong market for Australian coal even as overall usage drops.

Another plus for Aurizon is diversification into bulk haulage of freight. Investments in the space have limited dividend growth but they are expected to begin to drop after 2024.

We forecast dividend growth over the next 5 years of over 13% annually. This will come from growth in income of 7% and an increasing payout rate as capital expenditures drop.

Given the 4.90% current yield I believe Aurizon is a good opportunity for income investors interested in growth. Of the shares I have included on this list Aurizon offers one of the best opportunities to get a high current yield and strong growth. This margin of safety over my target provides comfort in the face of the headline risks of coal.

I currently hold Aurizon in my portfolio.


This pick may raise some eyebrows as the shares currently are yielding only 1.32%. This is a dividend growth play and the amount an income investor allocates to CSL should reflect that reality.

CSL is one of the largest global biotech companies and has two main segments. CSL Behring uses plasma-derived proteins or recombinants to treat conditions including immunodeficiencies, bleeding disorders and neurological indications. Seqirus is now the world’s second largest influenza vaccination business.

There is a lot to like about CSL although the company has struggled with regaining pre-COVID margins in the Behring division which contributes to weakness in the share price since 2020.

Other than a lower dividend than I would normally consider the company does meet my other criteria. It has a narrow economic moat, low levels of business risk as indicated by a Medium Uncertainty rating, a strong balance sheet and low cyclicality. The dividend payout ratio is also quite low at ~47% of earnings.

While the overall yield is low dividend growth has been significantly higher than many Australian shares. Over the past 10 years the dividend has grown at a compounded average growth rate (“CAGR”) of 12.82%. And our analysts expect that rate to accelerate over the next 5 years with a pojrected CAGR of 13.50%.

CSL is a longer-term play for income investors. The combined growth and yield are meaningfully higher than my target of 10% for income growth but there is no getting around the low yield. I personally have a fairly low allocation to CSL in my portfolio but I’m focused on the yield at cost which I expect to continue to rise over time. I’ve written about why yield at cost my favourite measure for my portfolio in this article.

Washington H Soul Pattinson & Co Ltd (ASX: SOL)

This is the only member of my list that I don’t own but I’ve been doing some research based on recent articles published by my colleagues James and Joseph. Washington H. Soul Pattinson, or Soul Patts, is a value-oriented investment house which invests in both public and private markets. Long-term holdings in the group’s three largest investments—TPG Telecom, Brickworks and New Hope Corporation—contribute more than half of the group’s circa $11.5 billion investment net asset value.

Soul Patts does not meet all of my investment criteria as our analysts do not believe the company currently has a moat. However, as a long-term, value-oriented investment house, Soul Patts benefits from some distinct advantages.

Most notable of these are its long-held ability and reputation within the Australian investment community of making sound capital allocation decisions and the ability to invest in a contrarian manner. Total Soul Patts’ shareholder returns have outperformed the ASX All Ordinaries Accumulated Index for five, 10, 15, and 20 years. An investment in Soul Patts is a bet that this streak continues.

Even without a moat the company does meet my other criteria. The company has a lower level of business risk as denoted by a Medium Uncertainty Rating, is non-cyclical given the diversity of the holdings and has a sound balance sheet with little debt and lots of cash.

Dividend growth has been strong over the past 5 years with a compounded annual growth rate of 9%. We expect dividend growth to accelerate in the future and grow at a 11% rate per annum over the next 5 years. The shares are currently yielding 2.22%.

The firm is committed to growing the dividend at a steady pace and the payout rate is adjusted as earnings fluctuate to maintain the growth. This focus on dividend growth provides comfort and Soul Patts has raised the dividend for 24 consecutive years.

Soul Patts is on my watchlist as a dividend growth play.


ADP is the largest position in my portfolio. Good thing I have strong convictions in the dividend growth prospects. ADP is a provider of payroll and human capital management solutions servicing the full scope of businesses from micro to global enterprises. ADP was established in 1949 and serves over 1 million clients primarily in the United States.

ADP checks all the boxes of my investment criteria. A wide economic moat due to high switching costs. A medium Uncertainty rating indicating low levels of business risk. A sound balance sheet with a capital-light business model that generates a ton of cash.

The company has returned $20 billion to shareholders over the previous 8 years through a combination of dividends and share buybacks. ADP is clearly committed to growing the dividend with 49 straight years of increases. I would expect capital dedicated to buyback to be diverted to dividends if the company struggles. The dividend payout ratio is below 60% and given the capital-light nature of the business that provides flexiability for management to maintain and grow the dividend.

Due to scale ADP offers significantly cheaper solutions to small and mid-sized businesses that are using smaller competitors. Winning new customers is one source of growth. And the company is also benefiting from cross selling additional services to support HR functions.

We estimate revenue growth of 6% annually over the next 5 years. We also forecast margins to increase another 2% in that period which supports our estimate of dividend growth of 8.5%. The shares currently yield 2.25%.

I hold ADP in my portfolio.

American Tower (NYSE: AMT)

I’ve written about American Tower before and why I’ve recently been purchasing the shares. American Tower owns and operates more than 220,000 mobile phone towers throughout the US, Asia, Latin America, Europe, and Africa. It also owns and/or operates 28 data centres in 10 US markets.

The company meets the criteria in my investment strategy. It is a non-cyclical business as mobile phones are used regardless of economic conditions. Mobile phones have become essentials in much of the world.

American Tower has a narrow economic moat given the efficient scale in the industry and the high switching costs for mobile providers to move to the competition. The company earns a Medium Uncertainty rating reflecting the relatively low business risk of the predictable business. The dividend payout ratio isn’t particularly relevant as the company is a real estate investment trust (“REIT”) and free cash flow is a more relevant figure than earnings. Free cash flow comfortably covers the dividend.

There are two main drivers of revenue. For existing tower tenants contracts provide for 3% annual price increases in the US and increases in line with inflation in non-US markets. This provides consistent revenue growth and supports the dividend.

More importantly, American Tower is well positioned to continue to grow earnings as data usage is consistency increasing around the world. Data growth is expected to grow in developed markets in the high teens over the next 5 years. In developing markets where smartphone adoption is increasing at a more rapid pace growth is expected to be higher. More data use means mobile phone companies need more infrastructure. American Tower capitalises on this growth by adding more tenants per tower which provides attractive returns.

The only area where American Tower doesn’t fit my investment criteria is the balance sheet. I am looking for companies in a strong financial position and American Tower increased debt to purchase the data centre business. However, the company has already brought down debt levels and is focusing cash flows in 2024 to reduce debt further. This will have an impact on dividend growth in 2024 and management is projecting a flat dividend for the year.

Once the excess debt is paid off I’m banking on dividend growth to return to historically rates. Average annual dividend growth has been approximately 20% since 2013 and even approaching those levels will more than meet my criteria to meaningfully exceed inflation.

Our analyst expects the dividend to grow at over an 8% annual rate for the next 5 years. The shares are currently yielding 3.3% which is the highest level of the past 10 years. I believe this represents an attractive entry point to meet my goals if dividend growth picks up after 2024.

I currently hold American Tower in my portfolio.

Diageo (NYSE: DEO)

Do you ever pour yourself a drink and think about dividends? I do. Diageo is a global liquor and beer giant. Brands include Johnnie Walker scotch, Smirnoff vodka, Crown Royal Canadian whiskey, Captain Morgan rum, Casamigos tequila, Tanqueray gin, Baileys Irish Cream, and Guinness stout. Diageo also owns 34% of premium champagne and cognac maker Moet Hennessy and a near-56% stake in India's United Spirits.

Diageo has a wide economic moat due to the strong stable of brands and the cost advantages associated with the company’s scale. There is miniimal business risk as reflected in the low Uncertainty Rating. The dividend payout ratio is reasonable at under 60% and the balance sheet is sound.

The share price has dropped around 25% over the past year but this provides a nice entry point for an income investor as the 3.10% yield is the highest since 2015. Concerns about consumer spending should abate and the long-term trend of premiumisation should provide an earnings tailwind as consumers trade-up to better quality alcohol.

Our analyst expects the dividend to grow at slightly more than 10% over the next 5 years based on earnings growth of 6% and increasing margins.

I currently hold Diageo in my portfolio.

Final thoughts

The following chart shows the 7 income growth ideas I outlined above. Total income growth comes from two sources. The first is the dividend growth rate and I’ve included our analyst’s projection for annual growth over the next 5 years. The second is the current yield which represents the income increase from dividend reinvestment. The yield will obviously fluctuate based on the share price but this is the best estimate for income growth from dividend reinvestment.

I believe all of the shares and ETFs I’ve outline are trading at attractive entry points for income investors. I have also included our fair value estimate as reference along with the criteria I use to evaluate investment opportunities.

Seven picks

Our success as investors is based on an uncertain future and the scenarios I’ve outlined for future income growth may or may not play out. I’ve outlined a summary of my rationale for selecting each of these 7 ETFs and shares but I would encourage each reader to do their own research before investing.

Next week I will focus on picks for higher current yields and lower growth rates but I would love to hear any thoughts or question in the meantime. You can email me at mark.lamonica1@morningstar.com

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