Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares are one of my favourite picks for ASX dividend income.
The investment conglomerate has a lot to like about it in terms of its passive income potential.
But to me, there needs to be more than just the dividend yield that's attractive. I'm looking to achieve capital growth, see long-term growth of the underlying value of the business, and invest at a good share price compared to the underlying value. From my outside perspective, that's the sort of things that the investment house is looking for with its own investment style.
I will talk about my three favourite reasons why I think Soul Pattinson shares are a solid option for ASX passive dividend income.
Sustainable dividend growth
Amazingly, Soul Pattinson has grown its annual ordinary dividend every year since 2000. That means it has increased its dividend each year for 23 years in a row. That's the longest dividend growth record on the ASX, and the dividend keeps increasing.
I think it was impressive that the business delivered a 20.8% increase to its annual dividend per share to 87 cents.
The company funds these dividend payments from the cash flow generated by the Soul Pattinson investment portfolio after deducting corporate costs, income tax, and non-regular cash flows. The directors determine the interim and final dividend based on the net cash flow from investments.
It said that its dividend payout ratio was 74% of net cash flow, which means it's still keeping around a quarter of its cash flow to re-invest into more opportunities.
Diversification
Soul Pattinson has a very diversified portfolio across a number of different asset classes including ASX blue chips, ASX small-cap shares, property, structured debt and private equity.
By being invested across a number of different areas of the investment world, Soul Pattinson has built a portfolio with strong diversification. This provides investors with more protection against different risks. The company has built a portfolio across different areas which the management team believe can provide resilient cash flow, uncorrelated returns and defensive earnings.
Another benefit is that by being able to invest in so many potential assets, it gives the business an opportunity to look across a wide number of compelling ideas and pick the best one.
Underlying value growth
Over the long term, the company is looking to grow its cash flow as well as its portfolio value. I've already mentioned that Soul Pattinson increased its cash flow in FY23 and over the years this number keeps increasing.
In FY23, the company said that its pre-tax net asset value (NAV) improved by 8.8% to $10.8 billion. That value changes slightly every day the ASX is open, but over time it's growing. Not only can its existing portfolio increase in value, but each year it's expanding its portfolio with new investments thanks to the re-invested cash flow.
Soul Pattinson has been adding a lot more money into its private equity and structured debt portfolios.
Over the long term, I believe the value of the underlying portfolio can increase and this will be a good gauge of the ability of the company to keep growing the dividend.
