Many investors who buy ASX shares on our stock market do so in order to receive a stream of passive income. This dividend income is one of the best and most reliable sources of passive cash flow available for most Australians, provided the dividend-producing investments that we pick are sound. That's easier said than done, however.
Let's get this out of the way first. There is no such thing as a 'safe dividend' on the ASX. No ASX share is under any kind of obligation to pay out a dividend. Even if a company tells investors to expect a certain payment, its management can change course right up until the moment the dividend is declared.
If you want a truly safe and dependable source of income, government bonds or a term deposit are your best bets for your $20,000.
Saying all of that, there are many shares on the ASX that pay reliable dividends to their investors. Barring some economic catastrophe or black swan event, there are many companies that I would have confidence in to keep paying dividends to their shareholders, rain, hail or shine.
Today, I'll go over some of the things I look out for when searching for the safest dividends on the ASX, as well as some of the stocks I think currently offer the share market's most reliable sources of passive income if you have $20,000 to spare.
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What do the ASX's safest dividend payers have in common?
For starters, most of the ASX's most reliable dividend payers operate in sectors that see inelastic demand for goods or services, regardless of the economic conditions. In other words, companies that attract customers whether the economy is booming or in recession, or whether inflation is high or low.
Consumer staples stocks, infrastructure companies and telecommunications providers are good examples. We all have to eat, pay our phone bills and use electricity, water, and transport on a regular basis. The companies that provide these services at the highest standards and at the lowest prices are always going to thrive, and by extension, pay out reliable dividends.
Next, it's prudent to look for some kind of moat, or competitive advantage, that these companies possess. This moat can help protect a company's profits from competition and ensure that those dividends remain reliable. This moat could come in the form of a strong brand, the widest store network, or owning an asset that customers find difficult to avoid using.
Finally, use the past as a guide. Past performance is never a guarantee of future success, of course. But if a company hasn't cut its dividend for over a decade, for example, it usually bodes well for its future income reliability
Some passive income stocks to consider
I think Coles Group Ltd (ASX: COL), Telstra Group Ltd (ASX: TLS) and Transurban Group (ASX: TCL) are three ASX dividend stocks that fit our criteria. Coles is one of the cheapest places we can obtain food and household essentials. Its vast network of stores ensures that a Coles supermarket is within easy reach of the vast majority of the Australian population. This ASX income stock has paid out a rising annual dividend each year since its 2018 ASX debut.
Telstra possess what is almost universally regarded as Australia's best mobile network, offering coverage to rural and regional areas that competitors struggle to match. This company's well-known brand and reputation have supported decades of dividends from Telstra.
Meanwhile, Transurban owns some of the most valuable infrastructure in the country. Motorists find it difficult to avoid using Transurban's tolled arterial roads that span Sydney, Melbourne and Brisbane. Lucrative contracts allow the company to raise its tolls by at least the rate of inflation several times a year in many cases, which helps protect its shareholders from a dividend cut.
Of course, these aren't the only reliable dividend payers on the ASX. But as long as you stick to high-quality companies that have reliable earnings streams and reputable histories of delivering income to shareholders, you can build a dependable stream of passive income using ASX dividend stocks.
