ASX dividend shares might be looking particularly tempting this year amid still-high inflation and the cost of living. After all, dividend stocks typically provide inflation protection and extra cash a few times each year.
But not all ASX dividend shares are built equal. Not to mention, picking those worth buying might appear particularly difficult after the market rallied last month.
However, I believe that looking for a few key qualities could help to determine if a passive income stock is really a buy in 2023.
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Three factors I think can point to a quality ASX dividend share
Competitive advantages
Buying ASX dividend shares with competitive advantages could prove a winning tactic. Companies with competitive advantages are often set up to push through tough times relatively unscathed compared to their peers.
Such advantages could be a loyal customer base, strong pricing power, a unique product, or a recognisable brand, to name a few.
Defensive characteristics
Another green tick I'd look for in shares in 2023 is defensive qualities. Of course, a company with competitive advantages will generally also be more defensive than one without.
However, truly defensive stocks offer products or services that are indispensable to their customers.
Thus, their revenue and profits will largely be protected no matter the economic environment. That might be particularly important in 2023 as Australians bear the brunt of consecutive interest rate hikes and inflation.
Examples of arguably defensive dividend shares include Woolworths Group Ltd (ASX: WOW), CSL Limited (ASX: CSL), and Transurban Group (ASX: TCL).
An affordable payout ratio
Finally, I'd look for ASX dividend shares with an affordable payout ratio.
While it might seem counterintuitive for passive income investors to buy ASX shares with lower dividend payout ratios, I think it could be a prudent move.
That's because a company handing nearly all its profits to investors probably won't have nearly as much left over to fund growth. And growth could very well equal bigger dividends in the future.
Not to mention, whopping payout ratios or dividend yields might indicate a share is cyclical.
While there's nothing wrong with buying cyclical shares, they very, very rarely hold the defensive characteristics I tend to look for.
Though, it is worth noting that no investment is guaranteed to provide returns, no matter how well-considered they are.
Bonus: ASX dividend shares trading for good prices
Imagine I'd just found a share housing all three qualities I'm looking for. There's just one more question to ask. And it's potentially the most important.
Is the stock trading at a good price?
Buying ASX dividend shares – or any share for that matter – for more than their worth is a reliable way to slow down returns.
Some simple ways to help determine if a share is trading for a good price include its price-to-earnings (P/E) ratio or price-to-book (P/B) ratio.
