The coronavirus has thrown up for a number of problems for dividend shares. I’m trying to keep my eyes open for a number of factors with potential dividend share buys.
It seems almost certain that there are going to be dividend cuts from ASX banks this year including Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Bank of Queensland Limited (ASX: BOQ), Suncorp Group Ltd (ASX: SUN and even Macquarie Group Ltd (ASX: MQG).
APRA has asked the banks to materially reduce their dividends so that they can remain strong.
It makes sense for the banks to cut their dividends, but what are income investors meant to do?
Here are some of the things I think about when it comes to dividend shares:
Does the dividend share actually have defensive earnings?
I believe that a dividend is only as defensive as the company’s earnings. If those earnings can easily fall by 20% or 50% then it wouldn’t be wise for the management to continue to pay a large dividend if it’s dangerously eating into the cash reserves.
I have never thought that banks have defensive dividends. Neither have insurers where profit can be wiped out by a natural hazard in any given year.
Cyclical shares like resources are price-takers, they can’t control what the price of iron, oil or coal does – just like what’s happened to the oil price this year.
Even if the trailing dividends look good, the lack of defensive earnings is why I don’t think that BHP Group Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) or Woodside Petroleum Limited (ASX: WPL) can be counted on for dividends through an entire cycle.
If you’re investing in dividends you don’t want your dividend cashflow to dry up just went you need it.
A look into the share’s dividend history can give insight what the dividend may do during recessions or other issues. How a business is able to cope in tough times is important. Seeing that the business wants to keep looking after its shareholders is important.
A dividend history is not a guarantee of future dividends, but it can be a useful indicator.
Business cash(flow) is king for dividend payments. If the cashflow keeps flowing into the business then it can continue to direct payments to shareholders.
The current coronavirus is causing a unique set of circumstances that is significantly affecting normal operations. So even some dividend payers with solid dividend histories may end up reducing dividends this year, depending how long and severe the disruption is.
What dividend shares could be reliable in this environment?
There’s no guarantee that the below ideas will keep growing, or even maintain, their dividends during this.
But based on their industry, earnings and profit reserve, I think the following dividend shares could remain reliable (that trading rules allow me to mention):
Brickworks Limited (ASX: BKW)
Rural Funds Group (ASX: RFF)
APA Group (ASX: APA)
Future Generation Investment Company Ltd (ASX: FGX)
Duxton Water Ltd (ASX: D2O)
Ramsay Health Care Limited (ASX: RHC)
I’m slightly less confident about Sonic Healthcare Limited (ASX: SHL), but it could be another to consider, particularly with its materially lower share price.
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Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO, FUTURE GEN FPO, and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Brickworks, DUXTON FPO, Ramsay Health Care Limited, and Sonic Healthcare 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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