Dividends may be really appealing to ASX income investors. Doesn't the sound of a growing dividend payment sound compelling?
Getting cash payments every year without having to do any work for it sounds like a good deal to me.
But should dividend growth be the first thing that investors look for? I'm going to look at that question in this article.
Why growing dividends is a good sign
Companies pay dividends from the profit they make, with dividend declarations decided by the board of directors.
It's no surprise that making a profit is a good attribute of a business. And if the dividend grows year after year, that's a good sign that the company is delivering profit growth.
If the board keep increasing the dividend, that's hopefully a sign of the directors' confidence about the long-term of the business and that the underlying value of the business is increasing. This may mean a rising share price, which is a good thing for ASX income investors.
We've seen over the last few years how dangerous inflation can be to the value of $1. I think it's a good idea to own companies that can overcome an inflationary landscape. Businesses with growing dividends can provide a cushion against inflation.
If a company keeps growing its payout, investors don't need to sell any shares to 'access' the financial growth of the business. Growing dividends is also helpful during downturns, as that can give our own finances good security.
Potential downsides
A growing dividend doesn't necessarily mean we're going to get heaps of dividend cash, at least in the short term. Some ASX dividend shares may have a low dividend yield, so yield-hunters be warned.
Another downside is the opportunity cost. The company could have re-invested that dividend cash, which might have enabled more profit growth and share price growth. But, ASX income investors may not be after that.
It's possible the growing dividend could be an unsustainable dividend – that's why it's worth checking the dividend payout ratio to see whether the payouts are being funded by this year's profit or whether the company is eating into its balance sheet.
Don't forget that some cyclical businesses can be good options for dividends, like ASX retail shares or ASX mining shares, but their dividend payments can bounce around and won't necessarily grow year after year.
Foolish takeaway
I have several ASX shares in my portfolio for their growing dividend payments, though it's not the only thing I look for. For me, the most important thing is that the valuation is good value.
