The Best ASX Dividend Stocks to Buy

An unanticipated and somewhat surprising development came out of the COVID 19 pandemic.

The Australian edition of the global financial website investing.com joined with  US based keyword research firm SEMrush to release research results strongly suggesting a new generation of first-time investors in global stock markets, based on internet search terms.

Here in Australia, the research found a 419% increase in the keyword search query “Stocks to Buy” year over year from 2019 to 2020, and a 238% increase in the March to April period of 2020 when global markets crashed and then recovered in startling speed, compared to the January to February period of 2020.

Moderately less dramatic was the increases in the keyword search query “How to Invest in The Stock Market”, up 241% year over year and 179% comparing the period from March to April against queries in January to February.

Among the myriad of questions facing these newcomers was the issue of buying Australian dividend stocks or stocks that do not pay dividends. Regardless of investing philosophy, all investors have the same ultimate goal – return on their initial investment.

Investment returns from non-dividend payers are determined by share price appreciation alone, while dividends are included in total shareholder return for investments in dividend payers.

On the surface, Australian dividend stocks seem the obvious choice, but there are differences of which newcomers should be made aware.

ASX listed stocks report financial results twice a year. The ASX website includes all company financial reporting and other relevant announcements. Companies that have had a banner year with revenue and profit increases along with solid future outlook have a decision to make with what is in essence extra cash.  Do they return some of it to their shareholders or do they reinvest the excess in growing the company in the future.

Perhaps a more significant difference is risk avoidance. The new field of behavioral finance tells us loss aversion is more important to investors than equivalent gains. Investopaedia.com is an excellent resource for information on behavioral finance. Dividend paying companies tend to be older, bigger, and more established than non-dividend paying counterparts in earlier stages of the life cycle of a business. Dividend payments are a sign of a financially healthy company.  The goal of many non-dividend payers is to grow large enough and financially strong enough to attract more investors by offering dividends.

There are a variety of issues to consider when searching for the best dividend stocks on the ASX.

The first, and arguably the most important is understanding the dividend yield investors find in researching stocks on internet financial websites.

Dividend yield is separate from the annual dividends paid. Instead, it is a function of the ratio between total dividends and current share price. While the first impulse of many newcomers is to find a pre-defined stock screener of ASX dividend stocks and gravitate towards those with the highest yields. This approach is fraught with risk. As a stock price falls, the dividend yield increases, meaning many stocks with yields in excess of 10% are there because the stock price is in decline. Yield is calculated by taking the total dividends paid over the last twelve months and dividing it by the current share price.  The calculation virtually guarantees daily fluctuation as the dividend yield quoted on all financial websites will rise and fall with the movement of the stock price.

Another critical issue for newcomers is the temporary nature of dividend payments. Dividends are not guaranteed and if a dividend payer sees trouble ahead, last year’s juicy dividend may be reduced or eliminated entirely.

There are measures available on financial websites that provide warning signs. The first is the payout ratio. This essential financial metric expresses the relationship between dividends paid and net income, with lower payout ratios indicating the company has the flexibility to maintain dividend payments in the event of declining income. Payout ratios in excess of 100% are a warning sign – the company’s income does not support the amount paid out in dividends.

The debt-to-equity ratio is another barometer for assessing a company’s ability to maintain current levels of dividend payments. The ratio measures the company’s use of debt to finance operations rather than utilizing existing resources. Debt to equity ratios above 60% are a sign of potential trouble.

Some financial websites include a company’s five-year dividend payment history, expressed as a yield percentage.

Younger investors can reinvest dividend payments into more stock  to benefit from compound interest over time. All Austrian investors have a major advantage when investing in Australian dividend stocks. Many companies are listed as fully franked, meaning the company pays taxes on the profits, sparing the investor. In the US markets both the company and the individual investor are liable for those taxes.

Here then are five of the best ASX dividend stocks to buy.

• Fortescue Metals Group (ASX:FMG)
• Rio Tinto Group (RIO)
• JB HiFi (ASX:JBH)
• Ampol Limited (ASX:ALD)
• Sonic Healthcare Limited (ASX:SHL)

Fortescue Metals Group (ASX:FMG)

At first glance, Fortescue’s trailing twelve-month dividend yield of 8.44%  as of 19March may give some risk averse investors pause, but the company’s five-year average yield is 7.86% and the dividends are fully franked. The yield’s all-time high was 18.64% in 2021.. Morningstar Australia is a comprehensive source for dividend information, both current and ten-year historical performance.

In addition, Fortescue’s share price appreciation over five years – up 300.6% – dwarfs that of a favorite dividend target of many Aussie investors – the big four banks. From the ASX website, here is the comparison:

Source: ASX

Year over year Fortescue stock is up 17.1% but 2024 has not been kind to the stock, down 15% year to date.

In FY 2023 Fortescue’s payout ratio was  acceptable at 62.1%.. Debt to equity is 0.27 , meeting the preferred under 2.0 standard. The company’s low trailing price to earnings ratio of  8.7 along with a five-year average P/E of 6.53 puts the  stock in bargain basement territory.

History is no guarantee of future performance and Fortescue is embarking on climate change initiatives that could split the company’s personality into a stable iron ore producer and a clean energy start-up.

Start-ups cost money and analysts are already predicting drastic drops in the company’s ability to maintain its stellar dividend record as money formerly paid out its dividends is devoted to development of the newly formed clean energy company, Fortescue Futures Industries.

The company’s Full Year 2023 Financial Results support the bear view – revenues fell 3% , profit dropped 23% and Fortescue cut  its dividend payment by 17%.

Fortescue bounced back in the Half Year 2024, with revenues up 21% and net profit up 41%, with dividend payments up 44%.

Goldman Sachs and other major analysts are predicting dire consequences for the company, largely due to significant capital expenditures to place the company in the clean energy space. The ASX website is a reliable source for company financial reports releases and other announcements.

Goldman has cut its forecast for the price of iron ore in 2025 to $95 US per tonne, down from 2024’s forecast of $110 US per tonne. Fortescue has a 72% interest in an iron ore project in the African country of Gabon, which is expected to start production in the second half of 2023.

Rio Tinto Group (RIO)

Rio Tinto may have a slight competitive advantage over Fortescue due to its diversified asset base, with copper and other metals supplementing the company’s iron ore production. Some analysts are skeptical about Rio’s dividend payments in the future for similar reasons for concern about Fortescue. Rio is expanding into the lithium space, which will require significant capital expenditures. The company is reportedly the only global diversified miner looking to enter the lithium space and has called on investment banks to help find potential targets.

The Serbian government ended Rio’s attempt to permit a lithium project there, but Rio has purchased the Argentina based Rincon lithium from brine project and is producing lithium from waste rock using a new process developed at the company’s boron mine in California. The latest development is a demonstration plant for lithium spodumene concentrate in Quebec.

The current dividend yield is 54% – as of 19 March –  with a five-year average of 5.97.  The lowest yield of the last decade of 3.52% came in 2016., with the highest in 2021 – 9.06%.  Payout ratio ballooned from FY 2021’a 52.59%to 90.3% in FY 2022, reflecting the company’s poor Full Year 2022 results where revenues fell 13% and net profit dropped 41%. In FY 2023 the payout ratio fell back to 63.75%. Debt to equity ratio is 0.25. Both the stock price and dividend payments have been resilient over the last decade. From the ASX website:

Source: ASX

Full Year 2023 financial results reflected challenging conditions , with revenues dropping 3%, net profit down 19%, and dividend payments slipping 11%.

JB HiFi (ASX:JBH)

JB HiFi is another example of a solid dividend payer over the last decade that may see some slippage. The current dividend yield is 4.44% with a five-year average of 5.83%. Over the last decade the yield has seen a low of 3.35% with a high of 12.98% in 2022. The payout ratio in FY 2023 was 74.6%. . Debt to equity is 0.40.

The company’s Half Year 2024 Financial Results reflected the inflation/high interest rate environment, with total sales down 2.2%, net profit down 19.9%, and dividend payments reduced by 19.8%.

JB HiFi sells consumer electronics and home goods online and in brick-and-mortar stores. The stock price year to date is up 16% but fell 4.84% in the month following the financial results release.  From the ASX website:

Source: ASX

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Ampol Limited (ASX:ALD)

In a step back in time, well known Caltex Australia returned to its original name of Ampol Limited (Australian Motorists Petrol Company) following the decision by Chevron to end the licensing arrangement allowing the use of the Caltex name.

Ampol is both refiner and distributor of petroleum products primarily in Australia and New Zealand where . New Zealand’s Z Energy was acquired in 2022.

The current dividend yield is 5.34%with a five-year average dividend yield of 3.31%. The lowest yield over the last decade was 1.04% in 2014.

The payout ratio jumped from  53.01% in FY 2022 to 86.99% in FY 210213.   The debt-to-equity ratio is 0.92.

Full Year 2023 Financial Results announced in February of 2024  showed total sales at an all-time high, up 22% from FY 2022, but statutory net profit dropped 25% . Ampol added a special dividend of $0.60 per share to the fully franked ordinary dividend of $2.15 per share.

The share price is up 35.4%  From the ASX website. From the ASX website:

Source: ASX

Sonic Healthcare Limited (ASX:SHL)

Sonic provides a full range of medical diagnostic, laboratory medicine, and pathology services to medical practitioners of all stripes. The company is a market leader here in Australasia, Europe, and North America.

The GFC (great financial crisis) proved that in the worst of times, there may be no such thing as a recession proof stock, but common sense suggests a company like Sonic comes close. Regardless of economic conditions, people still get sick and diagnostic imaging and laboratory medicine are at the forefront of determining what is wrong and what treatment is appropriate.  The COVID 19 pandemic challenged that bit of common sense, as diagnostic procedures were put on hold with the exception of the most serious cases.

Over the last decade Sonic has been a consistent dividend payer with share price appreciation of 612%.

Full Year 2023 financial results were heavily impacted by the reduction of revenues related to COVID 19, with revenues down 13%, and net profit down 52%.  COVID-related revenues fell 80%.

Half Year 2024 financial results released on 20 February showed revenues rose 5% but net profit fell 47%. Sonic did increase the interim dividend by 2.4%.  Management stood by its Full Year 2024 guidance.  From the ASX website:

Source: ASX

Sonic’s current dividend yield is 3.47% (including a 0.34% yield from a share buyback program), with a five-year average of 2.84%. The low point for the company’s dividend yield came in 2021 at 1.95%. The high point came in 2015, with a yield of 3.92%.

The payout ratio is 70.34%, with a five-year average payout of 53.88%. Debt to equity is 39.14%.

Just as it is unrealistic to assume the share price of a favoured stock will continue to climb upward and onward, it is unrealistic to assume a dividend-paying stock will continue to pay dividends into the distant future.

Dividend-paying stocks add an additional dimension to equity market investing for older and younger investors. Older investors benefit from passive income, and the younger ones benefit from the compounding that comes with reinvesting the dividends. Companies that have generated cash in excess of operational expenditures can either pay out some of the money to shareholders or reinvest in initiatives to grow the company.

Australian dividend-paying stocks are not without risk, as when conditions change, a company could reduce or eliminate dividend payments. Debt to equity, along with dividend yields and payout ratios over ten years, are valuable warning signs of potential risk.

FAQs

What Are Dividend Stocks?
Dividend stocks are shares in companies that distribute corporate earnings to shareholders in the form of a dividend payment. The dividend payments are determined by the company’s board of directors and are usually paid quarterly. Payments can be made in the form of cash or as a reinvestment in additional stock.

How to Buy Dividend Stocks
Buying dividend stocks is as simple as buying any other type of stock. You will need to open an account with a broker then research and select the stocks you wish to buy. You will need to own the stocks for a certain period of time before you are eligible to receive a dividend (the ex-dividend date).

How Do Dividend Stocks Work?
Dividend stocks work by sharing a portion of the company’s profits with it’s shareholders. This is paid via your brokerage account in the form of a dividend. There are four key dates to be aware of when trading dividend stocks: The announcement date when the dividend amounts are announced, the record date when the number of investors eligible to receive the dividend is recorded, the ex-dividend date when new investors will no longer receive the dividend and the payment date when eligible investors receive the dividend payment.

How to Evaluate Dividend Stocks
There are several factors to consider when evaluating dividend stocks. Investors should look for companies that are profitable over the long term with healthy cash flow to ensure they can sustain a dividend payment program. It is also wise to avoid companies with excessive debt, as any profits will likely go towards paying down debt rather than paying dividends.