ASX dividend shares are a great place to find a good source of income in my opinion.
Bank interest is now very low. People may want their money to work harder, particularly if income is the goal.
Growth shares can create solid returns with the compounding of earnings. However, growth shares can be risky because they may be overpriced and the growth may not go according to plan.
Dividends from ASX shares can be an attractive way to be rewarded each year. Share prices are volatile, whereas dividends can be consistent. Dividends are decided by the boards of companies, so businesses have more control of the dividend income for shareholders.
I think that dividend payments are a good sign of business profitability. It also shows that the leadership are thinking about their shareholders. You don’t want a CEO with an empire-building mindset who may lose a lot of money with risky acquisitions.
What type of ASX shares are good for dividends?
Do you want a mix of growth and income? Are you looking for the highest income? Is dividend growth your main concern?
The yield from an ASX dividend share is a big consideration. There are both positives and negatives to consider when thinking about high yield dividend shares.
If a business is paying out most of its profit each year as a dividend then there is little left for re-investment. It’s the re-investing for growth that is one of the key factors for long-term growth of the business.
But maybe you don’t want a lot of capital growth from your ASX dividend share. Perhaps a high level of income is all you want. In that case then shares like WAM Research Limited (ASX: WAX), Challenger Ltd (ASX: CGF) and Medibank Private Limited (ASX: MPL) could be decent ideas with their current yields.
Franking credits can really add to the yield on offer with the boost to the after-tax returns.
A healthy mix of income and growth
Some ASX dividend shares may not have grossed-up yields that are around 8% or over. They may be closer to the 5% level.
I like these types of income ideas the most because they may offer a good mix of long-term growth, whilst also paying solid dividends in the short-term.
If a dividend isn’t growing then it’s more likely to face a potential cut in the future. If a business isn’t moving forward then its competition is probably catching up. It’s the businesses with strong economic moats that can keep growing and fend off competition. I don’t think stagnant businesses are worth investing in for the long-term. Shares like banks aren’t attractive dividend ideas to me.
Some ASX dividend shares that offer solid yields now, with good growth potential, are: Brickworks Limited (ASX: BKW), Arena REIT No 1 (ASX: ARF), APA Group (ASX: APA), Amcor Plc (ASX: AMC), Invocare Limited (ASX: IVC), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) Service Stream Limited (ASX: SSM).
Fast-growth income shares
There’s also the option of going for shares that seem as though their dividend income will grow at a fast pace.
For example, a dividend yield starting at 3% doesn’t sound like much. But if the dividend payment grows by say 10% a year then it compounds into a much larger number over time. After several years the 3% yield could pay more in dollar terms than the high yield dividend share, plus it may come with pleasing capital growth.
ASX dividend shares that I’m going for
There is a lot of uncertainty at the moment with COVID-19 and with the US, particularly as it’s an election year.
If I had to pick some of the ASX dividend shares that I’ve named in this article for my portfolio I’d go for Washington H. Soul Pattinson, Brickworks, Magellan High Conviction Trust and Propel. They all offer decent starting yields and I think they are all trading at good value with good future growth prospects.
Where to invest $1,000 right now
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Amcor Limited, Brickworks, Challenger Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of APA Group. The Motley Fool Australia has recommended InvoCare Limited, Propel Funeral Partners Ltd, and Service Stream 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.