The ASX could be one of the best places to find investment income. Plenty of S&P/ASX 200 Index (ASX: XJO) dividend shares have attractive dividend yields.
Term deposit interest rates have jumped higher thanks to the interest rate hikes by the Reserve Bank of Australia (RBA).
One of the main attractions of salary earnings is that it's consistent. Boring dividends may not be exciting, but they may be what some people need if they're relying on the dividend income.
Fund manager Michael O'Neill from Investors Mutual points to evidence that dividends can provide more reliable returns than capital gains because dividend income is "decided by the company's board and is generally a reflection of the company's overall profitability".
He suggested that "an investor's dividends should stay much the same if they have a diversified portfolio made up of quality companies."
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Which ASX 200 dividend shares can provide resilient income?
The fund manager said that Investors Mutual prefers industrial businesses for long-term, consistently high dividends, while also trying to find ones that can provide a steady or growing dividend in this high inflation environment.
There are a few different things that the fund manager suggests could mean good performance during high inflation:
One factor is pricing power – "their strong market position gives them the ability to pass on rising costs to their customers e.g. home and motor insurance companies like Suncorp Group Ltd (ASX: SUN)."
Another suggestion was that the potential dividend players should be in a rational industry – "the main players are motivated by profit and act 'rationally' to maximise long-term profits – not spending large amounts of capital at the top of the cycle, or chasing market share at all costs through unprofitable discounting. The explosives industry for example has rationalised significantly and is at a strong point in the capital cycle, benefitting companies like Orica Ltd (ASX: ORI)."
The third idea was related to businesses that sell essential products and services – "people need to buy them, no matter how high prices go e.g. consumer staples companies like Metcash Limited (ASX: MTS)."
Finally, O'Neill suggested that potential ASX 200 dividend shares need to have "capable, proactive management that can put well-structured contracts in place that make difficult conversations about passing on inflationary costs easier. Ideally, contracts are structured with adjustments for inflation and pass-through of essential input costs such as fuel. Aurizon Holdings Ltd (ASX: AZJ) benefits from such contractual protections."
Financial estimates
Seeing as we're currently in the 2023 financial year, let's have a look at the FY23 projections on Commsec.
Suncorp shares are valued at under 12 times FY23's estimated earnings, with a possible grossed-up dividend yield of 9%.
Orica shares are valued at 19 times FY23's estimated earnings with a potential dividend yield of 2.75%.
Metcash shares are valued at 13 times FY23's estimated earnings with a possible grossed-up dividend yield of 7.8%.
Aurizon shares are priced at under 14 times FY23's estimated earnings with a potential grossed-up dividend yield of 7.7%.
