Could a low growth environment make ASX dividend shares sexy again?

Is it time for dividend shares to be fashionable again?

Small dog in bathrobe and wearing sunglasses and holding a green cocktail drink indicating a life of luxury with passive income shares

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In recent years, it has been the high-flying growth shares catching the attention of investors. And who could blame anyone for jumping aboard when the likes of Afterpay Ltd (ASX: APT), Xero Limited (ASX: XRO), and WiseTech Global Ltd (ASX: WTC) have returned 3,900%, 760%, and 870% respectively in the last 5 years.

However, one fund manager thinks times are set to change, which might see ASX dividend shares as the investment of choice once more.

Managing director and portfolio manager at Wheelhouse Partners, Alastair MacLeod, shared his bullish view on income-producing investments with Livewire last week. In his article, MacLeod outlined the case for a lower growth period ahead.

ASX dividend shares might flip the script

While dividend shares have been a cornerstone of many portfolios over the years, some have gone astray, enticed by the potentially life-changing capital gains on offer by some of the world’s more ambitious companies.

Even some of the world’s largest companies have continued to evolve and grow capital for their shareholders in the last years. Tech giants such as Apple Inc (NASDAQ: AAPL) and Alphabet Inc (NASDAQ: GOOGL) have grown by 460% and 280% in the last 5 years.

This incredible trajectory has attracted many investors away from the steady returns of even some of the most prized ASX dividend shares.

Although, that could be set to change if things pan out the way MacLeod thinks they might. The astute fundie points out that the United States, Australian, and European markets are all currently trading 30% to 40% above their 15-year price-to-earnings (P/E) ratio averages.

For this reason, MacLeod believes the premium valuations present a headwind for further capital appreciation. In response, income from dividends is believed to become more significant to total returns than it previously has been.

In highlighting the importance ASX dividend shares might play, MacLeod wrote:

Other studies have highlighted this from a dividend perspective, wherein lower growth decades (for eg the 1940s, 1950s and 1970s), returns from dividends contributed over 60% of total shareholder return.

In the most recent decade, this fell to only 17%, due in part to much stronger capital appreciation (which diluted the contribution from dividend income), plus less generous payout policies from companies.

Income inbound

Recently, global asset manager Janus Henderson Group CDI (ASX: JHG) has also shared its expectation for strengthening bank dividends in the near term.

At present, ASX-listed banks are offering solid dividend yields to shareholders, such as:

  • National Australia Bank Ltd (ASX: NAB) at 4.34% dividend yield
  • Westpac Bank Corp (ASX: WBC) at 5.19% dividend yield
  • Australia and New Zealand Banking Group Ltd (ASX: ANZ) at 4.99% dividend yield.

With the potential of rising interest rates in the future, we might see a rotation back to these high-yield names. As rates increase, investors tend to shift down the risk curve. In turn, the wind in the sails of growth shares could begin to subside.

McLeod proposes that this wind might find its way behind ASX dividend shares if the low growth environment does arise.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Mitchell Lawler owns shares of AFTERPAY T FPO and Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO, Alphabet (A shares), WiseTech Global, and Xero. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO, WiseTech Global, and Xero. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Apple, and Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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