Do your ASX shares have a moat?

If you’re not familiar with the investing term ‘moat’, it’s one that the great Warren Buffett coined many years ago. It refers to the concept of an intrinsic and protective competitive advantage a company has. In an ideal world, this moat should be wide enough that competitors can’t possibly cross it when they attempt to challenge said company. 

What does a moat entail?

Just think of 2 of Buffett’s favourite companies: Coca-Cola and Apple. Coca-Cola is the world’s most iconic cola drink. Its brand dominance is so entrenched that I reckon almost every human being on the planet knows what a ‘Coke’ is.

This enables Coca-Cola to charge more for a drink than its competitors, whilst still being able to maintain its dominant market share. Thus, we can say Coca-Cola has a ‘brand moat’.

Apple operates with a similar level of branding power. It’s able to charge far more than any of its competitors for a computer or a smartphone, safe in the knowledge that people will be willing to fork out semi-exorbitant prices just for the privilege of owning ‘an Apple’.

What about ASX shares?

So how can we apply this concept to S&P/ASX 200 Index (ASX: XJO) shares or the companies in your own portfolio? Well, ask yourself, ‘what makes a consumer buy this product?’ Is it a lack of competition? A powerful brand that helps a company stay above the pack? There are many different kinds of moats, but if a company has one, this is usually a sign that its shares will make a good investment at the right price.

Let’s take Telstra Corporation Ltd (ASX: TLS). Telstra is arguably the most expensive telecom company offering mobile plans in Australia. Yet almost 50% of the market chooses to go with Telstra. That’s probably because Telstra’s mobile network is the fastest and most comprehensive in the country (as its ads keep reminding us).

This is something that Telstra’s competitors can’t easily overcome, hence I would classify Telstra as having a ‘moat’.

It’s a similar story with Transurban Group (ASX: TCL).

Transurban owns and operates a network of toll-roads across the country. If you don’t wish to use one of Transurban’s roads, the only alternative is to find another, longer route around the road which doesn’t attract a toll.

Thus, Transurban doesn’t really have any competitors apart from a free ‘long way round’.

Foolish takeaway

Which companies in your ASX share portfolio would you say have a moat? Moats can protect a business in good times and in bad. And, as Warren Buffett’s track record shows, can also make a company an extremely lucrative investment. So make your next buy a company with a nice moat and your future self will probably thank you!

More reading

• The best ASX blue chip shares to buy in June
• The TPG share price is up 26.68% in 2020. Too late to invest?
• Brokers name 3 ASX 200 shares to buy right now
• Should you worry about geopolitical events in investing?
• 3 dirt cheap ASX shares to buy before it is too late

Sebastian Bowen owns shares of Coca-Cola and Telstra Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Apple. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Transurban Group. The Motley Fool Australia has recommended Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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The TPG Telecom Ltd (ASX: TPM) share price has been an amazing outperformer in 2020 so far. Since the start of the year, the broader S&P/ASX 200 Index (ASX: XJO) has lost 13.89% of its value. In contrast, the TPG share price has rallied 26.68%, based on today’s closing price of $8.50.

This means TPG has outperformed the ASX 200 by over 40%. Not bad!

But investors who may have been watching this extraordinary rally might be wondering if there’s still time to buy in.

Why TPG shares have been rocketing higher in 2020

The TPG share price has been benefitting from a number of key events that have gone its way in recent months. Firstly (and most importantly), the proposed merger of TPG and Vodafone Hutchison Australia has been approved by the Federal Court. This comes following attempts by the ACCC to block the merger last year.

Assuming all goes well and the merger proceeds, this will result in a special dividend being paid to TPG shareholders. The dividend has been estimated at up to 67 cents per share (which would be worth a yield of nearly 8%). The merger will also result in TPG finally securing the ticker symbol ‘TPG’, which is a win for simplicity, if nothing else.

Furthermore, TPG has told investors it plans to spin-off its Singaporean business into a separate company named Tuas Limited. All existing TPG shareholders will then receive shares in Tuas if this spin-off is executed. I believe this move is a positive for the TPG share price, as spin-offs generally deliver benefits for existing investors. We saw this play out with Wesfarmers Ltd (ASX: WES) and its spin-off of Coles Group Ltd (ASX: COL) in 2018.

All of these factors are building a very positive picture for investors and are behind the surge in the TPG share price this year.

Is the TPG share price a buy today?

With all of these changes ahead, it’s hard to know exactly what TPG shares are currently worth. After all, this company is set to be altered dramatically when its merger goes ahead. Furthermore, existing TPG shareholders will only own 49.9% of the new entity.

Still, let’s have a look at what the TPG share price is telling us today. So on current prices, TPG shares are offering a dividend yield of 0.59% on a price-to-earnings (P/E) ratio of 29.16.

This doesn’t really indicate good value from my perspective. TPG’s main competitor Telstra Corporation Ltd (ASX: TLS), by contrast, is trading on a P/E ratio of 18.69 and a dividend yield of 3.09%.

As such, I would much rather bet on Telstra shares today than TPG, given Telstra offers better value on current prices and a far heavier investment in 5G technology.

More reading

• 3 ASX dividend shares with yields over 10%
• How does the economy affect the ASX 200 share market?
• Is the Fortescue share price under threat from a potential multi-million dollar earnings hit?
• Are Coles shares a buy after falling 12% in 2 months?
• Brokers name 3 ASX 200 shares to buy right now

Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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Finding ASX dividend shares with yields over 10% can be a dangerous game. A yield over 10% normally indicates that the market views the yield as risky, and primed for a possible dividend cut. Otherwise, it’s likely that the share price would be bid up until the yield is lower.

So let’s take a look at these 3 ASX dividend shares with trailing yields over 10% to see if we can find a diamond in the rough.

BetaShares Australian Dividend Harvester Fund (ASX: HVST)

This exchange-traded fund (ETF) employs a ‘dividend harvesting’ strategy. This means it buys ASX dividend-paying shares just before they’re about to go ‘ex-dividend’, after which the fund sells them again. In this way, it rotates in and out of most of the dividend heavyweights on the S&P/ASX 200 Index (ASX: XJO).

On one level, this strategy works to produce formidable dividend income. HVST currently has a trailing yield of 12%, or 16.8% grossed-up with franking.

Sounds pretty good, right?

Well, the downside is that this strategy trades capital value for income. There’s usually no free lunch when it comes to investing. And swapping in and out of dividend shares is no exception. Since its inception in October 2014, the fund has actually gone backwards, delivering a return of (1.17%). As such, I’m not too wild on this investment.

WAM Research Limited (ASX: WAX)

This listed investment company (LIC) specialises in buying undervalued ASX growth companies and selling them after a pricing ‘catalyst’ comes to pass. It has managed to do this quite successfully, netting investors a 13.4% return per annum on average since 2010.

WAM Research pays most of its profits out as dividends, which have been rising every year since 2010 as well. On current prices, this dividend equates to a yield of 7.01%, or 10.01% grossed-up.

LICs normally pay dividends out of a profit reserve, so let’s take a look at WAX’s tank to see how well-funded this dividend is. As of 30 April, WAM Research has 26.2 cents per share in profits against its most recent dividend of 4.9 cents per share. As such, I think this is a rare diamond of an investment which can sustain a grossed-up yield over 10%.

Alumina Limited (ASX: AWC)

Alumina is Australia’s largest aluminium pure play and has amassed a reputation as a generous dividend payer over the last few years.

On current prices, Alumina is offering a trailing yield of 7.74% – which grosses-up to 11.06% with full franking.

Unfortunately, I think Alumina’s dividend yield is unsustainable. Aluminium prices have fallen substantially in 2020, which will crimp the ability of this company to keep shovelling cash out the door. This is probably the reason Alumina shares have collapsed in 2020 so far, falling from $2.30 at the start of the year to today’s closing price of $1.51.

I have to agree with the market sentiment on this one that Alumina’s dividend isn’t sustainable going forward.

More reading

• How does the economy affect the ASX 200 share market?
• Is the Fortescue share price under threat from a potential multi-million dollar earnings hit?
• Brokers name 3 ASX 200 shares to buy right now
• Ready to invest your first $1,000? Try these 2 ASX shares
• 3 cheap ASX 200 shares I’d buy today

Motley Fool contributor Sebastian Bowen owns shares of WAM Research Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post 3 ASX dividend shares with yields over 10% appeared first on Motley Fool Australia.

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