Commonwealth Bank of Australia (ASX: CBA) shares would not be my first choice for dividends, despite the ASX dividend share having a strong record of paying solid distributions. The ASX dividend machine I'd choose is Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
CBA may be the biggest ASX bank share, but it is also viewed as one of the most expensive banks in the world. The higher the price-earnings (P/E) ratio, the lower the dividend yield.
However, the dividend yield isn't the most important factor, and I'm not going to focus on it today. Instead, I would like to discuss three other characteristics that make me prefer Soul Patts over CBA at this time.
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Rising dividend
Soul Patts has the best dividend growth record on the ASX. The company has grown its annual ordinary dividend every year since 2000.
The dividend is not guaranteed to go up every year of course, but it's nice knowing there's a good chance there will be a raise.
Owners of CBA shares experienced a dividend cut in the COVID-hit year of 2020.
The Soul Patts dividend is paid from the cash flow generated from its portfolio of largely defensive investments. The business is invested in areas like resources, building products, financial services, agriculture, swimming schools, credit, property and telecommunications.
Soul Patts pays out most of its net cash flow each year as a growing dividend after paying for its expenses.
Growing portfolio value
With its remaining cash flow from its investments, Soul Patts regularly invests in new opportunities that could deliver long-term returns. Its existing investments, such as Brickworks Limited (ASX: BKW) and Tuas Ltd (ASX: TUA), can also grow in value.
As the underlying total value of its portfolio increases, this can increase how much investors are willing to pay for the business.
Including dividends, Soul Patts has delivered an average annual return of 12.4% over the past two decades. That's a solid level of return, in my opinion.
Diversification
Owning CBA shares means investor money is focused on a business that generates most of its profits from just lending to households and businesses in Australia and New Zealand.
Soul Patts is invested in numerous ASX shares and unlisted businesses such as Brickworks, Tuas, New Hope Corporation Ltd (ASX: NHC), TPG Telecom Ltd (ASX: TPG), CBA itself, Macquarie Group Ltd (ASX: MQG), Wesfarmers Ltd (ASX: WES) and Ampcontrol.
I like that diversification, plus it has flexibility in whatever sector it sees opportunities in.
