Earlier this week, The Motley Fool readers heard IML portfolio manager Michael O'Neill declaring 2023 as the time to double down on dividend shares.
His theory was that a global economic slowdown this year will force investors to rely on the consistency and reliability of income-producing stocks.
Even longer term, with the era of near-zero interest rates behind us, capital growth will be anaemic, according to O'Neill.
This means that investors will have no choice but to turn to shares that pay dividends for decent returns.
"While markets may or may not perform well in 2023, what is very unlikely is that we'll enter another long bull market with a similar amount of capital growth," O'Neill said on the IML blog.
"For us, with capital growth likely to be lower in the medium-long term, it's the right time to place greater focus on income."
Helpfully, he named four specific ASX dividend shares that his team loves at the moment:
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High dividends with pricing power and market dominance
In general, the IML team prefers industrials for "long-term, consistently high dividends".
"We are also looking at which sectors and stocks are likely to perform well, and so provide a steady or growing dividend in a high inflation environment."
All four of his picks are "currently trading at reasonable valuations":
| Company | FY2024 price-to-earnings ratio | FY2024 dividend yield |
| Aurizon Holdings Ltd (ASX: AZJ) | 12.3x | 7.3% |
| Metcash Limited (ASX: MTS) | 11.9x | 5.9% |
| Orica Ltd (ASX: ORI) | 16.1x | 3.4% |
| Suncorp Group Ltd (ASX: SUN) | 12.1x | 6.8% |
O'Neill's stocks each have slightly different strengths, which demonstrate the range of qualities that his team seeks in income-producing shares.
Suncorp is a classic example of a business that has pricing power.
"Their strong market position gives them the ability to pass on rising costs to their customers."
Explosives maker Orica is an example of a company operating in a "rational" industry.
"The main players are motivated by profit and act 'rationally' to maximise long-term profits – not spending large amounts of capital at the top of the cycle, or chasing market share at all costs through unprofitable discounting."
Grocery wholesaler Metcash is in the great position of selling goods that are considered "essential", which will not see waning demand due to a lagging economy or inflation.
Finally, O'Neill loves rail operator Aurizon due to the nature of its client agreements.
"Ideally, contracts are structured with adjustments for inflation and pass-through of essential input costs such as fuel," he said.
"Aurizon benefits from such contractual protections."
