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4 things I look for in good ASX dividend shares

ASX dividend shares are in big demand at the moment with interest rates being so low in Australia and around the world.

Who knows if interest rates are always going to be this low, but it certainly increases the importance of finding good-quality ASX dividend shares when you’re putting a lot of capital at risk.

These are some of the things I look for:

A stable, growing dividend

It may seem obvious, but some people start out by looking at a share’s dividend yield rather than a pattern of growing dividends.

Past performance may not be an indicator of future performance, but I think it does show the tendency of the business’ leadership to try to provide stable and growing dividends.

Two of the shares best known for their steadily growing dividends are private hospital business Ramsay Health Care Limited (ASX: RHC) and investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). And those dividends could keep going higher and higher as time goes on. 

Less than 100% dividend payout ratio

One of the most important factors for businesses to grow is re-investing for future profit, that’s what helps compound profit at a good rate.

But if a business is paying out more than 100% of its profit then it’s draining its profit reserve and taking away from the strength of the balance sheet.

It’s not sustainable for a business to keep paying more than 100% of its earnings, either the dividend is going to be cut at some point, or earnings will improve. Sadly that’s what happened to Telstra Corporation Ltd (ASX: TLS), which is why I never thought of it as a very reliable dividend share.

Long-term growth prospects

Obviously we also need to pay attention to the growth potential of the business. If the profit isn’t growing then the dividend can’t keep going up either.

The AMP Limited (ASX: AMP) dividend is a prime example, the profit went lower and so went the dividend.

But it’s businesses like REA Group Limited (ASX: REA) and Altium Limited (ASX: ALU) that have long growth runways and their dividends continue to grow every year.

Relatively shielded from competition and technological change

You want your dividend shares to have a good moat or be protected from technological change.

That’s why irreplaceable asset businesses like Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD) and APA Group (ASX: APA) can generate such reliably consistent cashflow each year abd why they’re attractive to income investors.

It’s also why shares like Rural Funds Group (ASX: RFF), Viva Energy Reit Ltd (ASX: VVR) and Arena REIT No 1 (ASX: ARF) can continue to generate good cash returns for shareholders year after year – their income is reliable, although it won’t go up fast either.

If you’re looking for solid dividend shares that could be great to own for the long-term then these ones could be just what you’re looking for.

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Tristan Harrison owns shares of Altium, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED, Sydney Airport Holdings Limited, Telstra Limited, Transurban Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited and REA Group 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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