People enter share investing for a range of reasons. Some investors chase high growth and are willing to accept the risk that comes with that. Others look for steady increases in share prices over time. However, many try to combine incremental share price increases, with reliable income, or dividend payments. This is the path that I prefer to take when I can. I do heavy research to find solid ASX dividend shares that are selling cheaply and offering reliable dividend payments.
If you buy these types of shares at a low price, then your personal dividend yield is higher. For example, Fortescue Metals Group Limited (ASX: FMG) currently pays a trailing 12 month dividend yield of 5.9% based on today’s price of $17.36. However, if you paid, say, $8.68 or half the current price, then your personal dividend yield would be 11.8%. That is an outstanding result in anybody’s book. It is very hard to get 10% reliable returns with mid-level risk.
Reliable ASX dividend shares
One thing I’ve learned throughout my investing journey is that everything carries a level of risk. For example, banks have always been considered reliable dividend shares. However, during the coronavirus pandemic, I learned that the Australian Prudential Regulation Authority (APRA) can tell the banks not to pay a dividend. If a third party can mandate whether my investment pays a dividend or not, that is an additional risk. This had never entered my mind prior to the pandemic.
The reality today is that dividend paying shares are changeable, and require active management. For instance, yesterday Rio Tinto Limited (ASX: RIO) declared the largest dividend payment in its history. This is because China, our largest iron ore customer, is actually a net importer of steel. This means that the millions and millions of tonnes we export to China each year are not enough to meet its needs.
If this changes, then the dividend equation also changes.
Real estate is another sector known to be a strong dividend payer. Nonetheless, this year we saw REITs with a strong exposure to either residential or retail properties suspend dividends due to coronavirus impacts. For example, retail focused REIT, Vicinity Centres (ASX: VCX) suspended its dividend payment on 1 June. Likewise, GPT Group (ASX: GPT) also withdrew guidance on 19 March.
In contrast, office or commercial focused REITs have not. Centuria Office REIT (ASX: COF), for example, went ex-dividend on 29 June. As with iron ore miners, the clue here is to understand the underlying business. If the market is telling you to change, then you should change.
2 alternative ASX dividend share options
The companies below cover a range of funds that also pay good dividends, are relatively stable, and are presently priced relatively low.
One of the newer infrastructure funds that interests me is New Energy Solar Ltd (ASX: NEW). This fund acquires, owns and manages large-scale solar generation facilities. It interests me firstly, because it doesn’t build these facilities for somebody else. Therefore, it has more of an annuity, or recurring style revenue stream. All 16 of the company’s solar plants are presently in operation across Australia and the United States. So it is basically an electricity generator with very low operating costs.
Secondly, and most importantly for any share investing, are the economic factors. New Energy is selling at a price to book ratio of 0.68. This means it is selling at approximately 32% lower than its net tangible asset value. At this price, the company has a trailing 12 month dividend yield of 6.8% which I think is very respectable. I believe that, over time, the share price will grow, but it isn’t going to see explosive growth, making this a good entry point.
Abacus Property Group (ASX: ABP) is ostensibly an REIT with 50.6% in office buildings, 34.4% in storage space, 6.8% in small convenience shopping centres, and about 8.2% in non-core assets. However, for me it is the 34.4% storage space I find interesting. Competing for corporate tenants in the office sector requires significant value add. In fact, in order to attract and keep good clients, there is both an initial and an ongoing expense.
Yet with self storage, this is vastly reduced to low level sustaining costs only, i.e. repairs, security, minor admin and making sure everything works. Abacus has begun to show a growing interest in accumulating storage assets. Recently it increased its holding in rival National Storage REIT (ASX: NSR) to 8.09%. Like New Energy Solar above, this moves more of the company’s revenues into the annuity or recurring business model.
Importantly, Abacus has a price to book ratio of 0.77 at the time of writing. Like New Energy, one could hypothetically buy the entire company and sell its assets for a profit. Abacus currently has a trailing 12 month dividend yield of 6.95%.
The coronavirus has turned many long-standing investing beliefs on their heads. For example, companies we used to think of as solid ASX dividend shares have found themselves either restricted from paying, or totally unable to pay. The lesson here for me has been that income investors also need to be active investors. Moreover, share investing for income requires a good understanding of the sector dynamics, and making sure that you are buying a company at a good entry price.