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Are these the 4 best dividend shares in Australia? 

woolworths
Credit: Scott Lewis

The SPDR S&P Global Dividend ETF (ASX: WDIV) tracks the S&P Global Dividend Aristocrats Index. The index is designed to select the top 100 stocks from global markets on the basis of high dividends which have been stable or growing for at least 10 years.

Just 4 companies from the ASX are currently in the index.

So are these the 4 best dividend shares in Australia?

There is no doubt that Woolworths has a great history of growing dividends. Shareholders were paid out 139 cents per share in 2015 compared to 59 cents in 2006. Unfortunately, this level of dividend growth looks unlikely to continue.

After its failed foray into the home improvement business, and Big W troubles, earnings are forecast to drop over the next 3 years. Falling earnings means falling dividends, and Woolworths looks set to lose its badge as a ‘Dividend Aristocrat’. Its dividend is expected to be around 25% lower in 2016 based on consensus estimates, representing a yield of around 4.7% based on the current share price.

Despite the recent issues, Woolworths certainly has the potential to get back on track as a great dividend stock in the future. In the long term, the tailwind is a growing Australian population. The headwind comes from increasing competition in the groceries market.

APA is Australia’s largest owner of oil, gas and electricity networks. Its dividend has grown by around 6% p.a. on average over the last 10 years.

With interests in some of Australia’s key energy infrastructure assets, its steady dividend increases look set to continue, making APA a good stock to consider for investors with a focus on long-term income growth.

APA is currently offering a yield of 4.7% based on a forecast dividend of 41 cents per share.

Sonic provides laboratory pathology and radiology services. It has slowly but surely increased its dividend over the last 10 years. Those who invested in 2006 are now receiving yearly distributions around twice the size.

Sonic has pulled back 25% after hitting an all-time high last July, hurt by the government’s plan to cut funding for pathology and diagnostics. On the plus side, Sonic has plans to introduce new fees in other areas to offset this, and its revenue is well diversified, with more than 50% coming from overseas.

Sonic offers reasonable value as a long-term dividend stock at the current price. A forecast 2016 dividend of 79 cents per share implies a current yield of around 4.4%.

Challenger is a fund manager and Australia’s largest annuity provider. Challenger has behaved a bit like an annuity itself, spitting out a steady stream of cash to investors over the last decade. Better yet, dividends have grown at an impressive 14% a year over this time.

Challenger just announced strong results for the first half of the year. With an ageing population and more retirees, demand for annuities looks set to continue growing, and the outlook for Challenger is solid.

Challenger is reasonably priced. With a dividend yield of 4.7%, it is definitely worth a closer look for income investors.

Foolish takeaway

For access to these stocks as part of a global portfolio, investors could consider State Street’s ETF (ASX: WDIV). However, the underlying index is based on historical dividend growth, which is not always a reliable guide to future yields.

For the best dividend stocks, a strong track record is a good sign, but an assessment of the potential for future dividend growth is more important.

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Returns As of 6th October 2020

Motley Fool contributor Matt Bugden has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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 Bruce Jackson.

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