S&P/ASX 300 Index (ASX: XKO) dividend shares could be the place to look for returns according to one fund manager.
The fund manager Michael O'Neill from Investors Mutual has suggested that capital growth in the next decade is "likely to be lower than the last decade".
With the end of ultra-low interest rates and available money, the very long bull market has been ended by high inflation and rising interest rates. He suggested that it's "very unlikely" that we are going to enter another long bull market with a similar amount of capital growth.
The fund manager suggested that volatility is going to stay elevated in the near term, but also suggested that it's a good time for stock picks, with "a great chance to pick up high-quality companies at bargain prices."
Time for dividends?
O'Neill suggested that the importance of dividends is increasing during times like these because they "provide more reliable returns than capital gains."
He noted that over the past 20 years, income returns made up just over half of total returns from ASX 300 shares. On top of that, while capital returns can be very volatile, the dividend returns are "remarkably reliable – making them particularly valuable when returns on capital are low, or negative."
The fund manager pointed out that capital returns rely on movements in individual share prices, but the level of dividends is decided by the company's board and the company's overall profitability. He concluded this point by saying:
In periods where the overall share market goes down, an investor's dividends should stay much the same if they have a diversified portfolio made up of quality companies.
He also suggested that dividend yields can act as a safety net at times of volatility. O'Neill suggested the Investors Mutual investment team have observed over many years of investing that "once sentiment starts to turn, companies with sustainable earnings that support a healthy, consistent dividend stream are often the shares that recover the most quickly."
Regardless of what happens with the share price, O'Neill said that when quality companies drop and the dividend yield is attractive and sustainable, long-term investors buy them so they can 'lock in' high-income levels.
Which ASX 300 dividend shares to buy?
The fund manager said investors should be cautious about risky sectors like commercial property, resources and other cyclical sectors. Instead, they prefer industrials, including ones that can perform well when inflation is high.
They look for names that have pricing power that can pass on rising costs to customers.
The investment team also want to find businesses that operate in a 'rational' industry where the main players are motivated by profit and act rationally to maximise long-term profit (not spending large amounts of capital at the top of the cycle, or chasing market share at all costs through unprofitable discounting).
Investors Mutual wants to look at businesses that sell essential products and services. It also wants to find companies that have good management, that can put "well-structured contracts in place that make difficult conversations about passing on inflationary costs easier."
In terms of which ASX 300 dividend shares could be good ideas, O'Neill picked out four names with relatively low price/earnings (P/E) ratios and high dividend yields: