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What I’m looking for in dividend shares during COVID-19

dividend shares
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Dividend shares on the ASX could be the best way to invest for the next period of the COVID-19 pandemic.

I think it’s quite interesting that large shareholders of both Afterpay Ltd (ASX: APT) and Pushpay Holdings Ltd (ASX: PPH) have recently decided to take some profit off the table. Those shareholders still own a majority of their shareholding, but the share prices of those growth businesses have run up very strongly over the last few months.

Dividend shares have not risen up as much. I think they’re worth looking at. Dividends are paid out of profit that the company has generated. Making profit is obviously better than losses. So I see profit as a sign of a business that has (hopefully) reached sustainability. 

This is what I’m looking for in dividend shares during COVID-19:

Dividend guidance

A business that has guided that it’s going to pay a dividend during this COVID-19 period is obviously attractive as a dividend share. For me, a high yield isn’t worth it if the dividend is just going to get cut when times get tough – that’s exactly when you may be relying on a dividend payment. I don’t think shares like Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) should be relied on as dividend shares.

I particularly like dividend shares that have guided that they will increase their dividend in the next result despite all of the economic impacts.

Some shares that have guided dividend increases for the upcoming reporting season are: Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Duxton Water Ltd (ASX: D2O) and Rural Funds Group (ASX: RFF).

Defensive earnings

Profit is not a guaranteed thing, that’s why shares are riskier than cash in the bank. Profits are going to be volatile. Just look at how the statutory profit of BHP Group Ltd (ASX: BHP) or Commonwealth Bank of Australia (ASX: CBA) can change year to year.

I like to go for dividend shares that should be robust in difficult times like a recession. Or even a global pandemic.

Rural Funds is a good example because it receives regular rental income from its tenants. We still need to keep eating food, even during a pandemic.

A business like APA Group (ASX: APA), which supplies half of the country’s natural gas, can generate reliable cashflow and therefore fund a consistent distribution.

In the current world a business like Amcor Plc (ASX: AMC), which supplies flexible and rigid packaging, continues to see good demand and is expecting higher revenue, which should mean a solid dividend.

Dividend history

Dividend shares that have already built a solid history of dividend payments to shareholders will not want to disappoint shareholders.

It can be unhealthy for a business to unsustainably chase the image of ‘reliable’ dividends – just look at Telstra Corporation Ltd (ASX: TLS), it was paying all (or more) of its profit out each year as a dividend. Dividend cuts were inevitable because profits weren’t rising. So you need to find businesses which have sustainable dividends.

Some of the ASX dividend shares I’ve already mentioned have long dividend track records. APA Group has increased its distribution every year for a decade and a half. Soul Patts has increased its dividend every year since 2000.

Yield

Obviously a dividend share has to start with a decent dividend yield. I’m not exactly sure what counts as good yield these days. The official RBA interest rate is now just 0.25%.

At the current Soul Patts share price, it offers a grossed-up dividend yield of 4.25%.

Rural Funds’ share price translates into a FY21 distribution yield of 5.6%.

With the FY20 distribution yield, at the current share price APA offers a distribution yield of 4.6%.

Foolish takeaway

Dividend shares may be able to provide stability for your portfolio with all of the volatility. I’d be happy to buy Soul Patts shares and a few other dividend shares for my portfolio right now. But patience could also pay off. It may be best to wait for the next dip to buy some shares, particularly if you’re looking at growth shares. 

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Tristan Harrison owns shares of DUXTON FPO, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of PUSHPAY FPO NZX. The Motley Fool Australia owns shares of and has recommended Amcor Limited, RURALFUNDS STAPLED, Telstra Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and APA Group. The Motley Fool Australia has recommended DUXTON FPO and PUSHPAY FPO NZX. 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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