3 key things I look for when buying ASX dividend shares

There are a number of factors I like to look at when thinking about ASX dividend shares.

A large number of ASX shares do pay dividends. However, that’s not the only thing I look for.

Names like Commonwealth Bank of Australia (ASX: CBA) and Woodside Energy Group Ltd (ASX: WDS) are known for their dividend payments. I don’t think size is an essential part of the picture.

For my own portfolio, these are the sorts of things I’m thinking about:

Growth potential

For me, a good dividend is at the end of the financial conveyor belt. I want to look at good companies, with seemingly good management, in attractive industries. The most important thing to remember is that a dividend is paid from the earnings that a business makes.

If a company’s profit were to steadily go down year after year but keep paying the same dividend, then the dividend will become unsustainable at some point, such as when the dividend payout ratio goes above 100%.

However, if earnings are growing, then obviously the profit can’t be falling. A growing profit suggests the business is doing well, and may imply the dividend can grow. A combination of rising dividends and climbing profit may lead to pleasing total shareholder returns.

A good ASX dividend share may not necessarily grow profit every single year. But, I’m looking for businesses that can grow their profit at a pleasing rate over the long term.

Companies such as Cleanaway Waste Management Ltd (ASX: CWY), Sonic Healthcare Limited (ASX: SHL), and Metcash Limited (ASX: MTS) are examples of names that are growing their dividend and underlying profit over time.

Dividend yield

A business isn’t necessarily an ASX dividend share just because it pays a dividend. It needs to have a certain level of dividend yield to count. With interest rates normalising, or already normalised, I think companies probably need to have a yield of at least 2.5%, or perhaps even around 3%, to truly count.

As an example, Altium Limited (ASX: ALU) has one of the most impressive dividend records going on the ASX. It has increased its annual dividend every year over the past decade. The actual payment has multiplied in size over the years. But, it currently has a dividend yield of around 1.25%.

Names like Accent Group Ltd (ASX: AX1), APA Group (ASX: APA), Baby Bunting Group Ltd (ASX: BBN), JB Hi-Fi Limited (ASX: JBH), and Telstra Group Ltd (ASX: TLS) are examples of companies with higher dividend yields.

Resilience

I’m typically looking for companies that have a good chance of continuing to pay good dividend income even during tougher times. I don’t want the dividend stream to disappear at the time I’m relying on it most.

Dividends aren’t term deposits, they can be cut. In 2020, we saw dividend cuts from many names including CBA and Transurban Group (ASX: TCL).

But, there were plenty of businesses that did grow their payout during the COVID-19 years, such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW), Rural Funds Group (ASX: RFF), Pacific Current Group Ltd (ASX: PAC), and Duxton Water Ltd (ASX: D2O).

Businesses that have resilient earnings profiles could be able to continue to pay dividends, even during tough times.

The post 3 key things I look for when buying ASX dividend shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Altium, Brickworks, DUXTON FPO, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, Brickworks, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended APA Group, Brickworks, RURALFUNDS STAPLED, Telstra Corporation Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Accent Group, Baby Bunting, JB Hi-Fi Limited, Metcash Limited, and Sonic Healthcare Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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