Investing in dividend growth stocks is a popular strategy in Canada and the United States. Here, you identify companies part of expanding addressable markets that have the ability to grow their earnings over time, which should result in consistent dividend hikes. A widening base of earnings should also drive share prices higher, resulting in long-term capital gains.
A combination of share price appreciation and rising dividend payouts generally allow dividend-growth stocks to deliver outsized returns to shareholders. One such blue-chip dividend stock is Brookfield Asset Management (TSX:BAM). Valued at US$16.5 billion by market cap, Brookfield Asset Management currently pays shareholders an annual dividend of US$1.52 per share, translating to a forward yield of 3.6%. These payouts have risen by 19% in the last year.
The bull case for Brookfield Asset Management
An alternate asset manager, Brookfield Asset Management navigated an uncertain macro environment with relative ease in 2023. It raised US$140 billion of capital last year, allowing the company to grow fee-related earnings by 6% to US$2.2 billion and distributable earnings by 7% to US$2.2 billion in 2023.
The capital raised in recent months positions BAM for strong growth in 2024 and beyond, especially if its cost base moderates going forward. While BAM invested US$50 billion in 2023, it ended the year with roughly US$100 billion of dry powder across business segments.
BAM’s assets under management totalled US$916 billion, an increase of 16% year over year or US$126 billion compared to 2022. Its fee-bearing capital stood at US$457 billion, up US$39 billion or 9%, and should touch US$500 billion in the near term.
BAM explained, “Our fee-bearing capital benefited from strong inflows as well as capital deployed during the year in addition to higher valuations on our permanent capital vehicles. This was somewhat offset by capital that we returned to our clients during the year.”
Brookfield Asset Management has more than 100 active funds across its businesses, covering a range of asset classes, products, and strategies. Some of the fastest-growing alternative asset sectors are infrastructure, renewable power, and energy transition, where BAM has a sizeable presence. BAM benefits from an early-mover advantage in each of these verticals as it identified megatrends such as decarbonization, deglobalization, and digitization that are shaping the global economy.
Is BAM stock undervalued?
Analysts tracking BAM stock expect it to grow adjusted earnings from US$1.37 per share in 2023 to US$1.54 per share in 2024. So, priced at 27.3 times forward earnings, BAM stock is not too expensive, given earnings are forecast to expand by 17.6% annually in the next five years.
With US$2.7 billion in cash and no debt, Brookfield Asset Management has the flexibility to reinvest capital in growth projects and raise dividends further.
BAM expects its fee-related earnings to grow at a steady pace in the upcoming decade. A stable stream of earnings should allow the company to grow its dividends and enhance the effective yield significantly.
In fact, BAM is confident of increasing dividends between 15% and 20% annually in the near term, making it one of the best dividend-growth stocks to own right now.
