Anyone who has searched for inflation-beating passive income from ASX shares in recent times has at one stage or another likely considered BHP Group Ltd (ASX: BHP) and its dividends.
The resource titan has long been a provider of decent dividends. More so over the past five or so years. Although, if the company's recent 40% interim dividend slashing is anything to go by, the days of near double-digit yields could be disappearing right before our eyes… at least for now.
That's why I'd personally look elsewhere for large and growing dividends.
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Where I'd go to find defensive dividends
A weakened economy induced by additional interest rate hikes could mean further deterioration in commodity prices. If so, this could put BHP's dividend yield under further strain.
While the current yield of ~8% is still juicy as a passive income source, there's every chance that it could trend back toward its pre-pandemic average of around 4.7%. The same could be said for other companies that are more influenced by the degree of consumer spending, including ASX retail shares, travel, etc.
Instead, I would look to companies operating in markets that are less sensitive to consumer sentiment. Some sectors that meet this condition in my eyes are transport, healthcare, and consumer staples. From there, it's a matter of finding fundamentally strong businesses.
These ASX shares offer yields above 5%
The first two companies I'd consider buying instead of BHP for defensive passive income are Healius Ltd (ASX: HLS) and Metcash Limited (ASX: MTS).
Neither of these two will necessarily knock your socks off in terms of growth. However, both companies operate in industries that are relatively insulated from economic weakness.
Firstly, Healius is a provider of pathology and radiology services. Regardless of the state of the economy, if someone feels sick or breaks an arm they'll need to make use of services made available by Healius. The ASX share currently offers a dividend yield of 5.5%, and if profits persist, there is potential for this to grow considering the modest payout ratio of 32%.
In a similar fashion, Metcash has a low reliance on the ebbs and flows of the economy. The $3.95 billion company operates food, liquor, and hardware stores; typically products that people 'need' rather than 'want'.
Right now, Metcash provides a passive income of 5.5% as well. Though, this might mediate somewhat in the near term as its forecast payout ratio exceeds 100%. Nevertheless, a constant demand for food gives Metcash a level of protection for its future payments.
Trading off yield for defensiveness
The third and final ASX share I'd latch onto for income instead of BHP is Transurban Group (ASX: TCL). Unlike the others, I don't foresee Transurban offering a better dividend than BHP any time soon. But what it lacks in yield it makes up for in its low risk.
In my opinion, Transurban is an incredibly defensive company. High upfront cost infrastructure is a quality moat, and Transurban's toll roads are exactly that. It can cost billions to build these assets, but once constructed, a well-planned toll road has little in the way of competition.
Furthermore, this type of business is less sensitive to economic cycles — though some suggest otherwise. During the GFC, Transurban reported underlying growth as drivers continued to seek a shorter route.
At present, a 3.7% dividend yield is up for grabs in Transurban shares. This is still above the percentage available in the S&P/ASX 200 Index (ASX: XJO) when excluding the top 20 which is dominated by the banks and miners.
