I'm building my own portfolio with a focus on ASX dividend shares that can deliver long-term growth.
I think each of the five holdings I'm going to write about can be winners in 2023 and beyond.
I certainly didn't invest with the one-year return in mind – but I do think the outlook is promising from here.
My strategy is to look for businesses that can grow their underlying value over the medium term and long term. I think companies that are growing their underlying profit, cash flow and/or value, will be able to fund bigger payouts for shareholders.
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Washington H Soul Pattinson and Co Ltd (ASX: SOL)
This one is the biggest position of the five in my portfolio I'm writing about.
Soul Pattinson is an investment business. It's invested in ASX shares like TPG Telecom Ltd (ASX: TPG), New Hope Corporation Limited (ASX: NHC) and Tuas Ltd (ASX: TUA). Some of its private investments include swimming schools, agriculture and electrical parts (Ampcontrol).
It pays out a majority of the dividend cash flow it receives to investors, after paying for its expenses. With the retained cash flow, it can reinvest into more opportunities to deliver growth.
I think its defensively-focused portfolio of assets could perform well regardless of whether things are volatile or not in 2023.
CommSec estimates suggest it could pay a grossed-up dividend yield of 3.9% in FY23. It has grown its ordinary dividend every year since 2000.
Brickworks Limited (ASX: BKW)
Brickworks has a cross-holding arrangement with Soul Pattinson. Each business holds a significant chunk of the other. Brickworks owns 26.1% of Soul Pattinson, and that chunk of shares is currently worth $2.64 billion according to the ASX. So, Brickworks benefits from Soul Pattinson's long-term growth and dividends.
Brickworks also owns half of two property trusts, including a $2 billion share of an industrial property trust in which large warehouses are being constructed. It also owns half of the Brickworks Manufacturing Trust (with Brickworks' share being $217 million), which owns some of the buildings where Brickworks' building products businesses are based. The other half of these trusts are owned by Goodman Group (ASX: GMG).
According to the latest valuation update, Brickworks will own $2.2 billion of net property assets across the two trusts. It's benefitting from strong rental growth, which is offsetting the effect of rising interest rates.
Add in the $2.64 billion of Soul Pattinson shares, and those areas of the business are worth $4.8 billion. Brickworks currently has a market capitalisation of $3.4 billion. So, I think there's a good discount there, plus I haven't mentioned the rest of the business including its 100%-owned land and its expanding building product segments in Australia and the United States.
It's expected to pay a grossed-up dividend yield of 4.2% in FY23, according to CommSec.
Fortescue Metals Group Limited (ASX: FMG)
Fortescue is probably not the type of ASX dividend share that can grow its dividend every year like Soul Pattinson and Brickworks have done. The ASX iron ore share's profit can change significantly as the iron ore price changes quickly as well. With the iron ore price above US$100, I think it can pay another big dividend in FY23.
But, I like the ASX dividend shares' long-term green efforts. Decarbonising its business could enable it to sell green iron, which could allow it to charge a higher price. Plus, the start of production at the Iron Bridge project could unlock more cash flow for the high-quality iron.
In the long term, I'm excited by the prospect of the company to produce green hydrogen. This could turn into a big profit generator for the business if it's able to execute well and there's a large global take-up over the next decade or two.
It's expected to pay a grossed-up dividend yield of 10% according to CommSec.
Bailador Technology Investments Ltd (ASX: BTI)
This ASX dividend share describes itself as a growth capital fund focused on the IT sector. It looks for companies with global addressable markets and invests in private technology companies at the 'expansion stage'.
Ideally, it looks for companies that are run by the founders, have a "proven business model with attractive unit economics," have international revenue generation, a "huge market opportunity" and have the ability to generate repeat revenue.
Some names in the portfolio include SiteMinder Ltd (ASX: SDR), InstantScripts, Rezdy, Straker Translations Ltd (ASX: STG), Access Telehealth and Nosto.
It's paying a 4% dividend yield based on the pre-tax net tangible assets (NTA) per share. At 30 November 2022, the pre-tax NTA was $1.74, yet the Bailador share price was $1.27 – a discount of 27%. A 4% yield on $1.74 is around 7 cents, which means a 7.8% grossed-up dividend yield from the ASX dividend share.
Long-term growth of the underlying value of the IT names within the portfolio can lead to growing dividends.
Altium Limited (ASX: ALU)
Altium probably doesn't count as an ASX dividend share.
However, when I first invested in the shares, it came with a dividend yield of around 3.5%. The dividend has grown significantly since then.
Altium has a number of software offerings for the electronic design industry, including Altium Designer and Octopart. It's benefitting from the increasingly technological nature of the world.
With COVID impacts largely fading into history, Altium is getting back to good revenue growth. I think it's on track for a very promising future over the rest of this decade.
CommSec numbers suggest that Altium could grow its dividend by 15% in FY23.
