ASX dividend shares are one of the most appealing types of shares on the Australian Securities Exchange, in my opinion.
Having the potential to benefit from a good cash dividend, franking credits and capital growth is an impressive combination.
However, we should make sure that our portfolio is doing a reasonable job of offsetting inflation.
As many households have experienced over the past couple of years, inflation has a terrible way of reducing the value of a dollar. According to the RBA, a basket of goods and services valued at $100 in 2019 would cost $116.76 in 2023.
I believe it's imperative to choose the right ASX dividend shares that can cope in an inflationary environment.
Which ASX dividend shares can offset inflation?
Many of the appealing businesses on the ASX should be able to handle inflation without much of a negative impact on their profitability. How?
For starters, many good companies will have net cash positions on their balance sheets, so their cash balances may be earning a good level of interest income amid elevated interest rates. However, the heavily indebted businesses will have seen their financing costs increase significantly during this period.
Many of the attractive businesses will have been able to pass on the inflation to customers through price rises. Some ASX dividend shares may have increased their product/subscription price at a higher rate than the inflation rate, while others may have achieved inflation-linked revenue growth.
If revenue is rising at a similar (or better) rate than inflation, then profit could be rising at a good rate, too. Great businesses can deliver operating leverage where rising margins help grow net profit faster than revenue.
A higher profit can fund a growing dividend and hopefully justify a higher share price over time.
Ideally, we want to see ASX dividend shares grow their payout at a similar or better pace than CPI inflation each year, or at least over multiple years.
Income stock examples
Dividend growth is not guaranteed, of course, but some companies have created track records of delivering growth. I'll give four examples of businesses with appealing dividend growth records.
Investment conglomerate Washington H. Soul Pattinson and Co. (ASX: SOL) has grown its annual ordinary dividend every year since 2000, and its FY24 payout was grown by 9.2%.
Brickworks Limited (ASX: BKW) is a building products and diversified asset business that has grown its dividend every year for the past decade and increased the payout by 3.1% in FY24.
Australia's largest private health insurer Medibank Private Ltd (ASX: MPL) has grown its dividend every year since 2020 and in FY24 the payout increased by 13.7%.
Youth apparel retailer Universal Store Holdings Ltd (ASX: UNI) has grown its annual dividend each year since 2021. In FY24, the ASX dividend share grew its annual payout by 61.4%.
By investing in these sorts of ASX dividend shares, investors can benefit from both good dividends and inflation protection, if the dividends keep rising.
