ASX dividend stocks are a wonderful way to make passive income in Australia.
Not only do some ASX shares pay wonderful dividends (or distributions), but Australian companies also have the added bonus of franking credits, which are refundable tax credits.
In other words, for high-income earners, the franking credits will reduce the tax burden of receiving the dividends. For lower-income earners, some (or all) of the franking credits may be refunded when the tax return is completed.
But, I wouldn't suggest investing in an asset or an ASX share just because of the possible income. The risk of a fall in the share price means we should try to identify good investments that are at good prices.
In my opinion, the below three names tick the necessary boxes.
Brickworks Limited (ASX: BKW)
Brickworks is the leading brickmaker in Australia. It also offers other products including roofing (through Bristle Roofing) which makes it fairly diversified.
The ASX dividend stock is also increasing its exposure to the northern hemisphere. It has been growing its brick market share in North America after making some acquisitions there. Plus, the business will soon be supplying millions of bricks to the UK after recently signing an agreement with a distributor.
Brickworks also owns two other major assets that are funding its dividend and delivering growth.
Firstly, Brickworks owns a large chunk of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares. Soul Pattinson itself has grown its dividend to shareholders every year for the last two decades.
Brickworks also has a 50% stake in a growing industrial property trust. That trust is building huge, modern warehouses on land that Brickworks no longer needs. This is enabling the generation of property development profits and unlocks a growing stream of rental income.
Brickworks hasn't cut its dividend for over four decades and currently has a trailing grossed-up dividend yield of 3.7%.
Adairs Ltd (ASX: ADH)
The Adairs share price has been one of the most-hit ASX dividend stocks during this period of volatility and uncertainty surrounding the economy as interest rates soar.
It's quite possible that the company's earnings will have a bumpy ride over the next year or so. The company sells furniture and homewares through three different brands – Adairs, Focus on Furniture and Mocka.
Adairs just reported its FY23 first half, which showed that earnings per share (EPS) was up 22% to 12.7 cents per share. The company also said that it was focusing on debt reduction – net debt fell by $12.2 million from June 2022 to $81 million at December 2022.
Despite that, Adairs decided to pay a dividend per share of 8 cents per share. If it were to pay an annual dividend per share of 16 cents for FY23, that would equate to a grossed-up dividend yield of 9.5%.
I think that retail conditions will improve in 2024, which could be helpful for both investor sentiment and hopefully earnings.
Rural Funds Group (ASX: RFF)
Rural Funds is a real estate investment trust (REIT) that owns farmland across Australia. That includes cattle, almonds, vineyards, macadamias, sugar and cotton.
The ASX dividend stock has a goal of increasing its distribution to investors by 4% each year. The Rural Funds share price is close to its 52-week low, so I think this is a very good time to consider investing.
While the cost of debt has increased, the REIT's rental income which is linked to CPI inflation is also getting a boost.
I think that this is a good time to invest while the distribution yield is elevated. A total distribution of 12.2 cents per unit could be paid in FY23, which would equate to a distribution yield of 5.2%.
For me, farmland seems like a good long-term investment that doesn't deteriorate in the same way that an office building or shopping centre does.
