There are many different ways of trying to analyse dividend shares. There are several factors including the dividend yield, the payout ratio, how many years in a row it has grown its dividend, the safety of the business model and how likely it will be able to increase the dividend in the medium-term future.
Just focusing on the yield alone can be a trap. The Telstra Corporation Ltd (ASX: TLS) yield has always looked good, but there was a low chance of the dividend being sustained when its payout ratio was so high and competition was mounting.
Here are three of the best dividend shares on the market in my opinion:
WAM Research Limited (ASX: WAX)
WAM Research could deliver the biggest amount of dividends over the next three years because it already has a projected grossed-up dividend yield of 8.4% for FY18.
It has increased its dividend every year since the GFC and currently has three years of profit reserves for the dividend at this level.
WAM Research is able to pay such a strong dividend because it has been a strong performer as a listed investment company (LIC). It invests in undervalued growth companies it thinks it will beat the market, otherwise it sits in cash. This cash, which was 25.6% of the portfolio at 30 June 2018, provides protection and ammo for opportunities in market downturns.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
Soul Patts is one of the oldest businesses on the ASX and it has paid a dividend every year for many decades including through wars and various recessions. It has increased its annual ordinary dividend every year since 2000, which is an excellent streak.
It has been able to pay this growing dividend because it has generated long-term outperformance by making long-term investments in businesses it thinks are sound choices.
Soul Patts only pays out a certain percentage of its operating cashflow each year and re-invests the rest for further profit growth. This may be one of the 'safest' dividends on the ASX.
This is only one of two agricultural real estate investment trusts (REITs) on the ASX. Farmland has been a useful asset for hundreds of years and is likely to be valuable for a long time to come.
It has rental indexation built into all of its contracts which are linked to either CPI inflation or a fixed 2.5% increase.
Management believe that the distribution can increase by 4% each year for the long-term. This isn't amazing growth, but it could be a good slow-and-steady grower over the coming years.
Foolish takeaway
I think it would take a GFC-like event for one of the above shares to reduce their dividend. They are all building their profit reserves so that steady income growth is even more assured.
At the current prices I'd buy shares of Rural Funds. WAM Research is trading at a significant premium to its NTA and Soul Patts' dividend yield has reached a low due to the strong price performance over the past year.
