The Best ASX Dividend Stocks to Buy in 2023

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

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

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 from March to April of 2020 when global markets crashed. They then recovered at startling speed compared to the January to February period of 2020.

Moderately less dramatic was the increase in the keyword search query “How to Invest in The Stock Market.” It was up 241% year over year and 179% comparing the period from March to April against queries from 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 – a 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 newcomers should be aware of the differences.

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 a solid outlook have the decision to make about 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 behavioural finance tells us loss aversion is more important to investors than equivalent gains. Investopedia.com is an excellent resource for information on behavioural 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. Many non-dividend-paying companies aim to grow and become financially strong enough to attract more investors by offering dividends.

There are various issues to consider when searching for the best dividend stocks on the ASX.

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

The dividend yield is separate from the annual dividends paid. Instead, it is a function of the ratio between total dividends and current share price. 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 over 10% are there because the stock price is declining. Yield is calculated by taking the total dividends paid over the last twelve months and dividing the figure by the current share price. The calculation virtually guarantees daily fluctuations as the dividend yield quoted on all financial websites will rise and fall with stock price movements.

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.

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 could maintain dividend payments in the event of declining revenue. 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 utilising 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 as a yield percentage.

Younger investors can reinvest dividend payments into more stock to benefit from compound interest. All Australian investors have a significant 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 are our recommended best ASX dividend stocks to consider in 2023.

Fortescue Metals Group (ASX:FMG)

Fortescue’s trailing twelve-month dividend yield on 5 November 2023 is 7.53%. The company’s five-year average yield is 9.86%, and the dividends are fully franked. The yield has ranged from a low of 1.72% in 2013 to a high of 18.64% in 2021.

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

Source: ASX 5 November 2023

Fortescue’s payout ratio is acceptable at 85.75.7%, with a more admirable five-year average of 63.2%. Debt to equity is 29.56%. The company’s low trailing price-to-earnings ratio of 9.71 puts the stock in bargain basement territory.

History is no guarantee of future performance. 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 in dividends is devoted to developing the newly formed clean energy company, Fortescue Futures Industries.

The company’s Half Year 2023 Financial Results support the bear view – revenues fell 4%, profit dropped 15%, and Fortescue cut its dividend payment by 12.8%.

Full Year 2023 results saw revenues decline 3% while net profit fell 23%. Goldman Sachs and other major analysts predict dire consequences for the company, mainly due to significant capital expenditures to place the company in the clean energy space.

In February 2023, Goldman came out with an optimistic forecast for the price of iron ore – a 20% increase over the next three months and 10% over six months; however, on 14 August, the investment bank downgraded its forecast by 12%.

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 its iron ore production. Some analysts are sceptical about Rio’s dividend payments in the future for similar reasons to the concern about Fortescue. Rio is expanding into lithium, which will require significant capital expenditures. The company is reportedly the only global diversified miner looking to extract lithium, and it has called on investment banks to help find potential targets.

The Serbian government ended Rio’s attempt to start a lithium project there. Still, 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 4.79% – as of  5 November 2023 —  with a five-year average of 6.78%. The lowest yield of the last decade, 3.85%, came in 2013, with the highest in 2021 – 9.06%. Payout ratio ballooned from its five-year average of 62.48% to 91.53%, reflecting the company’s poor Full Year 2022 results, where revenues fell 13% and net profit dropped 41%. The debt-to-equity is 26.39%. The stock price and dividend payments have been resilient over the last decade.

Source: ASX 5 November 2023

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 6.75%, with a five-year average of 5.66%. Over the last decade, the yield has seen a low of 3.35%, with a high of 7.53% in 2022. The payout ratio is 73.24%, with a five-year average of 61.34%. Debt to equity is 46.15%.

The company’s Half Year Financial Results should have pleased investors with 8.6% revenue growth and a 14.6% increase in net profit after tax. In addition, the dividend payment for the interim period was up 20.9%. The stock declined on the unwelcome news that sales growth is slowing.

Full Year 2023 Financial Results showed total sales up 4.3%, with net profit after tax (NPAT) declining 3.7%. JB HiFi sells consumer electronics and home goods online and in brick-and-mortar stores. The stock price year over year as of 5 November is up 9.79%.

Source: ASX 5 November 2023

Ampol Limited (ASX:ALD)

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

Ampol is a 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 of 5.9% is the ten-year high, and the five-year average dividend yield is 3.83%. The lowest yield over the last decade was 1.08% in 2014.

The payout ratio is high at 420.23%, with a five-year average of 71.82%. The debt-to-equity ratio is 95.95%

Full Year 2022 Financial Results showed profit up 42%, with dividend payments increased from $2.25 per share in FY 2021 to $2.75 this fiscal year.

The share price is up 17.73% year over year as of 5th November.

Source: 5 November 2023

Macroeconomic conditions in the energy sector favour Ampol, earning the company some analyst BUY recommendations, but in the longer term, electric vehicles hitting forecasted market penetration could change the picture.

Sonic Healthcare Limited (ASX:SHL)

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

The GFC (great financial crisis) proved that in the worst of times, there might 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 become unwell 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 except for the most serious cases.

Over the last decade, Sonic has been a consistent dividend payer with share price appreciation in excess of 150%.

Source: ASX 5 November 2023

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.