It's getting harder these days to find a good dividend stock on the ASX. Telstra Corporation Ltd (ASX: TLS) had more than a decade of paying a solid dividend, yet this year it announced a large dividend cut. I think that was the right thing to do because the underlying business needed the money.
However, that doesn't leave many choices in the ASX20 for dividend options. People may point to the big banks, but they are relying on a heavily indebted Australian population to continue making their loan repayments.
So, is Wesfarmers a good dividend stock?
Why it could be a good dividend stock
The first thing that a dividend stock needs to have is a good dividend yield. It passes on this front, Wesfarmers has a 7.37% grossed-up dividend yield.
I also like to see that a dividend share has a good history of dividend increases, meaning that management want to increase the dividend if the business is able to. Wesfarmers has increased its dividend every year since the GFC, which is a strong record.
Another thing that I like to see from a dividend share is that it has a sustainable dividend payout ratio. It shouldn't be above 100%, below 90% is starting to be a good ratio. Wesfarmers had a payout ratio of 88% for FY17, which is satisfactory.
The most important thing for any business is that it has a good chance of growing profit in the future. Wesfarmers has a number of growing businesses, particularly its star business Bunnings.
Why it may not be a good dividend stock
Wesfarmers has an illustrious future going back over a century. It has built its operations into an impressive conglomerate structure. However, many of those businesses are now facing trouble.
Coles has been continually reducing margins over the past few years to compete with Woolworths Limited (ASX: WOW) and Aldi.
Target has been struggling to find its identity and its profit has been heading downwards for years.
Officeworks has done well but Amazon could soon decimate its business.
Wesfarmers' industrial businesses have had a good last twelve months, but those businesses are quite cyclical and it could easily turn sour over the next year.
Is it a good buy?
Ultimately, for Wesfarmers to remain a good dividend stock it will need to continue growing its underlying business to maintain (let alone grow) its current dividend.
