ASX dividend stocks can be an excellent source of passive income, but I wouldn't say every business is a good option for dividends.
Companies that can consistently grow their payouts over time are very appealing because of the reliability they offer investors.
A growing dividend is a good sign of increasing profits and rising underlying value.
There are not that many businesses that have a habit of increasing their payouts year after year. Growth is not guaranteed of course, but the below two businesses have a track record of growth and I'm optimistic about further increases because of a couple of reasons for each idea.
Wesfarmers Ltd (ASX: WES)
Wesfarmers is the company that owns retailers like Bunnings, Kmart, Officeworks, Target and Priceline. It also owns businesses in the healthcare, chemicals, energy and fertiliser sectors.
The more diversified a business is, the broader range of operations it has to support its dividend. I think it's a good idea for a business to have the ability to invest in different sectors to find the best opportunities. That's one of the reasons why Wesfarmers has been such a good long-term investment, in my view.
The ASX dividend stock has the flexibility to buy into some sectors and sell out of others, ensuring it remains future-proof.
Wesfarmers continues to invest for growth in a number of ways, such as expanding Kmart's Anko products into overseas markets, like North America and the Philippines. It's also expanding the product ranges in Bunnings in areas like pet care and auto.
Wesfarmers has steadily increased its payout following the Coles Group Ltd (ASX: COL) demerger several years ago. The impressive profitability metrics of Kmart and Bunnings suggest to me that ongoing sales growth can lead to higher profits for Wesfarmers and fund higher payouts.
APA Group (ASX: APA)
APA is an important business in the energy sector because of how its gas pipelines and electricity transmission move energy around the country to where it's needed.
The ASX dividend stock has managed to increase its payout every year for the last 20 years. I'd put that down to two main factors.
First, the vast majority of the ASX dividend stock's revenue is linked to inflation, which means it benefits from regular increases over the years.
Second, the business has steadily expanded its portfolio of energy assets. Each asset generates cash flow for APA, so each additional pipeline it builds or electricity asset it acquires increases the earnings it can use to pay dividends.
While this isn't a high-flying stock, I like its defensiveness and consistent distribution growth for investors.
