Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares could be an excellent S&P/ASX 200 Index (ASX: XJO) share pick for Australians who want to build a second income.
We can only earn so much from our work earnings, whether that's as an employee or business owner. How good would it be to top up those earnings with dividend income from ASX shares?
There are a variety of names on the ASX that pay dividends, such as Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP). But, they aren't the first names I'd choose to build a second income.
Investment house Soul Patts can provide three things that I think income investors would really benefit from.
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Diversification
It can be very easy for Australians to end up having a significant portion of their wealth tied up in residential property, ASX bank shares and ASX mining shares. Investing in the Vanguard Australian Shares Index ETF (ASX: VAS) does mean more than half of the portfolio is invested in just two sectors – banking and mining.
As an investment house, Soul Patts is able to give exposure to different assets and sectors.
It's invested in areas like swimming schools, agriculture, water entitlements, telecommunications, retirement living, resources, financial services, credit, industrial property and plenty more.
It has investment mandate flexibility to invest wherever it wants to, giving it the widest horizon to find leading opportunities that can provide the defensive and/or growing earnings that Soul Patts is looking for.
By owning the cash flow-generative assets that Soul Patts does, the ASX 200 share is able to provide shareholders with a resilient and growing payout, which I'd suggest exactly suits portfolios wanting a second income.
Good income credentials
On some metrics, I'd say Soul Patts has the claim to be the best ASX dividend share Aussies can buy.
It doesn't have the biggest dividend yield, but it's the payout growth consistency that is incredibly attractive. It currently has a grossed-up dividend yield of 3.3%, including franking credits, at the time of writing.
Soul Patts' board of directors has hiked its regular annual dividend every year since 1998. It has also paid a dividend every year for 120 years in a row. No other ASX share has a dividend track record as reliable as that. Of course, no dividend is guaranteed, but Soul Patts has proven to be very effective at delivering dividend growth.
I'm confident of future dividend increases because Soul Patts' investments are themselves growing, plus Soul Patts maintains a healthy dividend payout ratio which can enable sustainable dividend growth even if earnings don't grow that year.
Capital growth
The other reason I think the ASX 200 share is a pleasing option for a second income is that it can provide capital growth over time. ASX dividend shares are not term deposits – a good one can provide good income and a rising share price.
Over the past five years, Soul Patts shares have risen by 46%, at the time of writing.
Soul Patts' share price follows the direction of its portfolio value, which has increased over time.
Soul Patts also steadily adds to its portfolio each year using retained earnings.
I think Soul Patts is one of the best options for a second income, and I think its long-term future is compelling, along with a few other names.
