Investing in ASX dividend shares

Investing in ASX dividend shares

For some investors, dividends are the backbone of a diversified portfolio… for others, they are not a priority. It just depends on your investment approach and temperament.

In this article, we’ll look at how to invest in ASX dividend stocks and why they may be worth considering for your share portfolio.

Australian dollar $100 notes fall out of the sky, indicaticating a windfall from ASX bank shares
Image source: Getty Images

What are ASX dividend shares? 

One of the benefits of investing in the share market is the potential to receive income via dividends from the shares in your portfolio. Dividends are the payment of company earnings to shareholders (the company owners). 

ASX dividend shares are companies that regularly pay dividends to their shareholders. 

They are usually well-established companies that tend to be consistently profitable and committed to rewarding their investors through dividend payments. 

To receive dividends, all an investor needs to do is buy dividend shares. Dividends will then be deposited automatically into the investor’s account when they are paid.  

Why invest in ASX dividend stocks? 

Dividends provide a way for investors to receive a return on their investment without having to trade shares. This can be particularly useful in periods when the market is down, meaning it is difficult to achieve capital gains on share purchases. 

Dividends can provide a good hedge against inflation, particularly if they increase over time, and they may also carry certain tax advantages due to franking

5 top dividend share performers in FY22

(based on market capitalisation from high to low)

Company Market capitalisation Description
BHP Group Ltd (ASX:  BHP) $243.1 billion A global commodities producer, operating in more than 90
locations including Australia, South America, the US, and Canada.
Products include iron ore, copper, nickel, and metallurgical coal
Westpac Banking Corporation (ASX: WBC) $82.6 billion Provides consumer, business, and institutional banking and wealth
management services through a portfolio of financial services
brands and businesses
Fortescue Metals Group Limited (ASX: FMG) $61.9 billion An iron ore business comprising integrated mining, rail, shipping,
and marketing teams that together export more than 180 million
tonnes of iron ore annually
Wesfarmers Ltd (ASX:  WES) $55.2 billion Australian retail conglomerate behind Kmart, Bunnings, and
Officeworks, and also operates industrial and healthcare businesses
Rio Tinto Limited (ASX:  RIO) $41.9 billion A mining and metals company operating in 35 countries around the
world. It is focused on aluminium, copper, minerals, and iron ore

Empty heading

BHP

A leading global commodities producer, BHP mines copper for renewable energy, nickel for electric vehicles, potash for farming, and iron ore and metallurgical coal for steel production.  

BHP’s iron ore business continued to perform strongly in the March quarter of 2022 and remains on track to achieve full-year volume and cost guidance. The Queensland metallurgical coal business also delivered strong underlying performance amid record-high prices. BHP intends to merge its oil and gas portfolio with Woodside Petroleum Limited (ASX: WPL) by June, which will create value for BHP shareholders. 

In the first half of FY22, BHP reported record earnings and strong shareholder returns. Earnings per share was 211 US cents, with an interim dividend of 150 US cents per share declared. This represents a payout ratio of 78%. Over the long term, BHP says population growth, decarbonisation, and rising living standards will drive demand for its products for decades. 

Key metrics: 

  • Market cap: $243.1 billion (as of 28 April 2022)
  • Average daily volume: 17.3 million
  • Headquarters: Melbourne, Australia 
  • Dividend yield: 9.98%

Westpac

Established in 1817, Westpac is Australia’s oldest bank and one of the four major banking corporations in Australia. It is also one of the largest banks in New Zealand. The company serves more than 13.9 million customers through its portfolio of brands including St George, Bank of Melbourne, BankSA, BT, and RAMS. 

Westpac saw cash earnings rise in 2021 with credit quality remaining remarkably good despite the challenges of COVID-19. A reduction in impairment charges and lower notable items drove improved earnings. 

Westpac is making strong progress on simplifying its portfolio and consolidating its international footprint. It completed the sale of four businesses in 2021 and announced three further asset sales which are due to complete in 2022. This simplification is expected to result in a reduced cost base. 

Cost savings, a strong capital position, and an improved economic outlook have given the Westpac board confidence to conduct a $3.5 million off-market share buyback. Total dividends for 2021 were 118 cents per share, representing a 62% payout of cash earnings excluding notable items. 

Key metrics: 

  • Market cap: $82.6 billion (as of 28 April 2022)
  • Average daily volume: 9.3 million
  • Headquarters: Sydney, Australia
  • Dividend yield: 5% 

Fortescue Metals

One of the world’s largest producers of iron ore, Fortescue has operations in the Pilbara region of Western Australia, including the Chichester, Solomon, and Western mining hubs. Its mining infrastructure is connected to Port Hedland via the fastest heavy-haul railway in the world. 

The price of iron ore has been on the increase in 2022 as steelmakers resume production and transport and logistics systems are unclogged post-pandemic. Fortescue shipped a record 93.1 million tonnes of iron ore in the first half of FY22 and has provided full-year guidance of 180–185 million tonnes. The company had a dividend payout ratio of 70% of the net profit after tax (NPAT)

Fortescue is expanding its focus to incorporate green energy opportunities through subsidiary Fortescue Future Industries and aims to reach carbon neutrality by 2030. Green energy initiatives include potential hydrogen projects in Papua New Guinea, Indonesia, New Zealand, and Germany. 

The company is also continuing exploration work, which remains key to sustaining product quality in the core iron ore business. With a well-established presence in South America, Fortescue is assessing exploration and development opportunities in Peru, Chile, Brazil, Portugal, and Kazakhstan. 

Key metrics: 

  • Market cap: $61.9 billion (as of 28 April 2022)
  • Average daily volume: 9.7 million
  • Headquarters: Perth, Western Australia
  • Dividend yield: 13.66%

Wesfarmers

Wesfarmers has a diverse range of business operations covering home improvements, apparel and general merchandise, office supplies, health, beauty and wellbeing, chemicals, energy and fertilisers, and industrial and safety products. 

One of Australia’s largest employers, Wesfarmers has been listed on the ASX since 1984. In the half-year to December 2021, Wesfarmers delivered NPAT of $1,213 million and an interim dividend of 80 cents per share, fully franked. This was a solid financial result despite ongoing disruptions in operating conditions since the onset of COVID-19. 

In early 2022, Wesfarmers acquired the previously ASX-listed Australian Pharmaceutical Industries Limited. This will form the foundation of a new health division, as the company grows capabilities in the expanding health, wellbeing, and beauty sectors. 

Long-term growth is being supported by investment in a market-leading data and digital ecosystem as well as the direction of capital to areas with strong growth prospects. Divisional e-commerce capabilities are being strengthened and online ranges expanded as the company invests in technology and supply chain initiatives.

Key metrics: 

  • Market cap: $55.2 billion (as of 28 April 2022)
  • Average daily volume: 2.2 million
  • Headquarters: Perth, Western Australia
  • Dividend yield: 3.49%

Rio Tinto 

Rio Tinto is one of the world’s leading producers of iron ore, with an integrated portfolio of 17 mines, four port terminals, and a rail network spanning nearly 2,000 kilometres. It has a large-scale aluminium business including bauxite mines and alumina refineries as well as aluminium-producing smelters. 

Rio Tinto’s copper operations span the globe from Mongolia to Chile, with demand set to grow driven by industrialisation and increasing requirements for renewable energy. The minerals business includes Rio’s diamond exploration, mining, and sales business which provides a reliable supply of white and coloured diamonds. 

In 2021, Rio Tinto benefitted from the recovery in the global economy, which resulted in significant price strength for major commodities. This led to record financial results that enabled the company to pay its highest ever dividend of 1,040 US cents a share, representing a 79% payout ratio. 

Rio has a well-positioned portfolio and is undertaking disciplined investment in the commodities that are expected to see strong demand in coming decades. This includes the recent acquisition of a lithium project in Argentina. 

Key metrics: 

  • Market cap: $41.9 billion (as of 28 April 2022)
  • Average daily volume: 1.7 million
  • Headquarters: London, United Kingdom
  • Dividend yield: 12.61%

Are ASX dividend shares right for you? 

Dividends are an important contributor to investment returns, providing investors with income even when the market takes a downturn or is moving sideways. Because dividends are derived from company profits, the payment of dividends is generally seen as a sign of financial health. 

Buying shares in established companies with a record of returning earnings to shareholders adds stability to an ASX shares portfolio. 

Dividend-paying shares provide a source of regular income that can cushion the impact of a potential decline in share prices, while also providing investors with the chance to benefit from potential share price increases. 

Last updated May 2022. Motley Fool contributor Katherine O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Learn More About Investing with The Motley Fool

Interested in learning more about investing? Then be sure to browse our "Investing Basics" knowledge hub, which we've created to help more people learn about the wonders of investing. It's just our small way of helping make the world Smarter, Happier and Richer.