Many shares on the ASX are currently still sitting well below their all-time highs. This means that on the surface, many ASX shares are offering a higher dividend yield. However, chasing the highest-yielding dividend shares can be a trap, as many companies will be forced to cut or even suspend paying dividends. Just look at the pressure the big four ASX banks are under.
That's why I think it's important to look at the sustainability of a share's dividend. Try to determine if it has the capacity to continue paying its dividend, or even maybe increase it, even under the poor market conditions created by COVID-19.
Finding a sustainable dividend doesn't necessarily mean it has to be low yielding. Below are three ASX shares which I believe have the ability to continue paying their current dividend or even increase it from here. And the cherry on top is they each currently have a grossed-up yield above 5%.
Rural Funds Group (ASX: RFF)
The first was the easiest choice for me to make. Rural Funds currently offers investors a dividend yield of 5.88% which is distributed quarterly. It has been increasing its dividend payments by 4% annually, in line with its stated goal. And this was no different for Rural Funds' upcoming dividend to be paid on 30 April. Rural Funds confirmed the dividend increase when it reaffirmed its guidance late last month. This makes Rural Funds one of the few ASX shares to continue increasing its dividend payments in these unprecedented times.
However, this will come as little surprise to shareholders. Rural Funds leases its properties to land managers and these lease agreements are usually long-term in nature with built-in indexation. I believe the security of this rental income from high-quality tenants allows Rural Funds to forecast these dividend increases with significant accuracy.
Bapcor Ltd (ASX: BAP)
Bapcor is probably a company which doesn't make as many dividend share lists when compared to other ASX dividend-paying shares. However, after its recent share price drop, Bapcor currently offers investors a grossed-up dividend yield of 5.2%. Not bad considering the growth Bapcor was experiencing prior to the lockdowns.
I'm sure Bapcor's earnings will take a hit. However, the company is still providing parts and services to many cars, trucks and emergency service vehicles. In addition to this, Bapcor has historically retained a significant proportion of its earnings for reinvestment into the company for growth. In fact, for the last financial half, Bapcor only paid out 50% of its earnings as dividends, giving its dividends a cushion against an earnings decrease.
Even if Bapcor's earnings were to decrease significantly, causing a dividend cut, I believe it won't be sustained. I would agree with the analysts from Macquarie Group Ltd (ASX: MQG) and expect Bapcor's sales to rebound quickly once the lockdowns have ended.
Tassal Group Limited (ASX: TGR)
Tassal Group is the largest salmon farmer in Australia, recently also branching into farming prawns. This addition increases Tassal's revenue diversification with prawns also offering a higher $/kg yield.
Along with the rest of the market, Tassal shares were sold off in the recent crash, but have since rallied around 30% to sit at $3.89 today. Despite this rebound, Tassal shares still offer a grossed-up dividend yield of 5.12%.
I believe demand for Tassal's salmon and prawns will remain strong. After all, we still need to eat and Tassal has been increasing its focus on the domestic market. Additionally, it is forecasting a stronger second half and earnings growth in FY20 and beyond. For these reasons, I believe Tassal's dividend should be safe from a cut, and may even see an increase.
