Dividends are an important form of return on your share investment. If you're investing for income they're also an important form of revenue.
We take a look at 2 metrics that can help you identify high dividend ASX shares.
The dividend yield
The dividend yield shows how much a company pays out every year in dividends relative to its share price. It is the dividend only return on your share investment, i.e. your return without taking account of capital gains.
Investors who need reliable income will look for companies that pay reliable, reasonably high dividends. Well established, mature companies with a stable history of dividend payments are more likely to fit into this category. These companies tend to have higher dividend yields than early stage growth stocks.
Screening stocks using the dividend yield is one way of identifying shares paying a decent level of dividends. From there, further investigation can be conducted. Don't automatically assume that the higher the dividend yield the better – a high dividend yield can be a sign of a falling share price, and there could be a reason for that.
The payout ratio
The payout ratio is the proportion of company profits that are paid out as dividends. Different companies pay out different amounts of their profits to shareholders.
Companies in stable industries with reliable cashflows will be more able to sustain a steady payout ratio. Companies in cyclical industries or with uneven cashflows may tend to maintain a lower payout ratio as a buffer against downturns. Some companies have target payout ratios that they try to meet. They aim to pay out a certain proportion of profits as dividends each year.
Telstra Corporation Ltd (ASX: TLS)'s dividend policy is to pay a fully franked dividend of 70–90% of underlying earnings. AGL Energy Limited (ASX: AGL) targets a payout ratio of approximately 75% of underlying profit after tax where a minimum franking level of 80% can be maintained.
Using the metrics
The dividend yield and payout ratio are useful metrics to use when comparing shares. They can also be used as screens to filter out groups of stocks for further investigation. Some types of companies are more likely than others to pay out company profits as dividends – these 2 metrics can help you quickly sort one from the other.
Foolish takeaway
Dividends are an integral component of the returns on your investment, and if you rely on dividends for income they can impact your quality of life. These metrics will help you uncover the real dividend return offered by different ASX shares.
