Are ASX banks or miners buys for dividends?

It's getting harder for income investors to find the right investments to generate income. Are ASX banks or miners buys for dividends?

There are plenty of different options to consider for dividends on the ASX.

Major ASX banks have been favoured income options for a long time. Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) were common features in a blue chip dividend portfolio.

Regional banks like Bank of Queensland Limited (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN), MyState Limited (ASX: MYS) and Suncorp Group Ltd (ASX: SUN) were also picks for historically high income yields.

There are plenty of miners with reputations of being big dividend payers like BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).

But are they good buys today?

The best time to buy cyclical businesses like miners is at the bottom of the cycle. The demand and price of iron ore from China has been strong for a few years now. That's why Fortescue has been one of the best performers in the ASX 50 over the past year with a total shareholder return of 174.5% (according to CMC).

Miners could be the best candidates for income over the next 12 months. 

Using the 2020 dividend payments, Fortescue has a grossed-up yield of 14.5%. BHP has a grossed-up yield of 6.6%. Rio Tinto has a grossed-up yield of 8.25%.

Fortescue clearly has the biggest yield, though it has just gone ex-dividend so you'll have to wait another six months for the next dividend payment.

But if you're focused on total returns then I'm not sure the (iron ore) miners are worth buying today. Though gold miners could be an interesting idea to consider. 

Banks are facing a lot of economic difficulties when it comes to COVID-19. Large credit provisions and conservative dividend payout expectations by APRA are causing the banks to significantly reduce their dividends. CBA's final FY20 dividend was just $0.98 per share. Westpac decided not to pay any interim dividend.

I think that there are some ASX 20 dividend shares that could be worth buying such as Macquarie Group Ltd (ASX: MQG) and Wesfarmers Ltd (ASX: WES). Whilst they have also suffered due to COVID-19, their dividend payouts look much better compared to the big banks bearing in mind the share prices of Macquarie and Wesfarmers have recovered more strongly.

Other ASX dividend shares I'd rather buy

One of the negatives about investing in the ASX's blue chips is that many of them don't actually have strong growth prospects. They have already become the biggest businesses in the industry. They can't really grow at a fast pace any more. 

A business like CSL Limited (ASX: CSL) still has plenty of growth potential, but it's not known as an income share.

But there are smaller businesses out there with a more reliable dividend. These smaller ASX shares have more growth potential, which means their profit and dividends can grow much more over the next decade as well.

For income, I'd be interested in names like investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), diversified property business Brickworks Limited (ASX: BKW), farmland real estate investment trust (REIT) Rural Funds Group (ASX: RFF) and listed investment company (LIC) WAM Microcap Ltd (ASX: WMI). Most of them are in my portfolio. 

The above ideas may not have a huge dividend yield like Fortescue, but I believe they could be more reliable over the long-term. For example, Soul Patts has increased its dividend every year for the past two decades and Brickworks hasn't cut its dividend for over 40 years. WAM Microcap is also attractive for its regular payment of special dividends.