ASX dividend shares might be all the rage, but just buying stocks for high yields is a recipe for trouble.
That's because a point-in-time yield percentage reveals nothing about the future prospects of the business.
It's no use harvesting a 15% dividend if the share price halves!
That's why professional investors always emphasise the importance of achieving a harmonious balance of dividend yield and capital growth potential.
Here are two such examples from the S&P/ASX 200 Index (ASX: XJO):
'An attractive valuation' with 5 major tailwinds
According to the team at Auscap Asset Management, NIB Holdings Limited (ASX: NHF) currently has "an attractive valuation".
"We believe that NIB is a high-quality defensive business led by a highly capable management team with exposure to multiple attractive end markets," it stated in a memo to clients.
"Trading on a reasonable valuation, with good forecast earnings per share growth over the coming years, we are enthusiastic about the future prospects for the company."
The way Auscap analysts see it, the private health insurer has exposure to five rising themes.
"There are parts of the economy which should grow even faster than average, including healthcare expenditure, immigration, international student demand, inbound tourism, and services related to the National Disability Insurance Scheme (NDIS)."
Companies that are riding on these trends "often trade on very high valuations".
But not NIB.
"NIB is trading on a 17.5x forward price-to-earnings ratio, towards the bottom end of its historical range since the 2014 Medibank Private Ltd (ASX: MPL) IPO."
The NIB share price has risen 10.5% over the past 12 months, leaving it with a dividend yield of 3.1%.
'A sensible approach to growth and risk'
For Airlie senior investment analyst Joe Wright, general insurer QBE Insurance Group Ltd (ASX: QBE) is in a sweet spot of its business cycle.
"Several years of above-trend catastrophe events (CATs), as well as COVID-related business interruption claims and the return of broad-based inflation, has seen the commercial insurance market tighten considerably," Wright said on the Airlie blog.
"The net [effect] has been a prolonged period of premium rate growth not seen since the early 2000s."
Insurance is the rare industry that's whistling all the way to the bank at the moment.
Ten consecutive months of interest rate rises is providing excellent returns on its investments, and inflation is merely giving it an excuse to exercise its pricing power.
"We continue to believe QBE is underearning as margins for both the North American business unit, and more recently the Lloyd's syndicates, have dragged on group performance," said Wright.
"To date, [chief executive] Andrew Horton has demonstrated a sensible approach to growth and risk management, and for all of these reasons, QBE still looks attractive to us at ~9.5x P/E."
QBE shares have rocketed 24.3% over the past 12 months while providing a dividend yield of 2.54%.
