Investing in ASX dividend shares

What are ASX dividend shares? 

ASX dividend stocks are shares in companies listed on the Australian Securities Exchange that pay regular dividends to shareholders. 

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). They are a form of passive income that income investors seek. 

ASX dividend shares  (also known as income stocks) are companies that regularly pay dividends to their shareholders. They are typically well-established companies that are consistently profitable and committed to rewarding their investors through dividend payments. 

To receive dividends, all an investor needs to do is buy dividend shares. A dividend payment is deposited automatically into the investor's bank account when the relevant company declares dividends.   

Why invest in ASX dividend stocks? 

Dividends provide a way for investors to receive a return on their investment without actively trading shares. This can be particularly useful when the market is down and achieving capital gains on share purchases is challenging. 

Dividends can provide a good hedge against inflation, particularly if they increase over time, and they may also carry certain tax advantages thanks to franking credits. This can make them a tax-effective form of income. 

Companies pay dividends out of their profits, so companies that pay regular dividends need to be consistently profitable. Large companies that pay dividends tend to be fairly stable. But dividends are not guaranteed and vary depending on a company's profitability. 

Top dividend shares on the ASX

Many ASX-listed companies representing a broad cross-section of market sectors pay their shareholders dividends, typically twice a year. Here are three top ASX dividend stocks based on market capitalisation from high to low.

BHP

BHP is a leading global commodities producer and the top-ranking company by market cap listed on the ASX. The company mines copper for renewable energy, nickel for electric vehicles, potash for farming, and iron ore and metallurgical coal for steel production. In FY22, BHP reported record earnings before interest tax depreciation and amortisation (EBITDA) of US$41 billion. 

BHP merged its oil and gas portfolio with Woodside Petroleum Limited in the first half of 2022 and agreed to buy Oz Minerals Limited (ASX: OZL) at an enterprise value of $9.6 billion in the second half.  Oz Minerals has a portfolio of low-cost copper-focused assets in Australia and Brazil, with exploration activities in Australia and internationally. 

BHP had earnings per share (EPS) of 470.6 US cents in FY22 and paid a dividend of 325 US cents. Over the long term, BHP says population growth, decarbonisation, and rising living standards will drive demand for its products for decades. 

Westpac

Established in 1817, Westpac is Australia's oldest bank and one of the country's four major banking corporations. 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 delivered a solid financial result in 2022, with a statutory net profit of $5,694 million, up 4%. A fully franked final dividend of 64 cents per share was declared, taking full-year dividends per share to $1.25, up 6%. 

All banking divisions grew core earnings strongly in the second half. Westpac saw higher growth in mortgages and business lending. Credit quality improved, with stressed exposures falling. The bank is sharpening its focus on core banking, reduced costs, and improved service. 

Fortescue Metals

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

Iron ore prices increased in 2022 as steelmakers resumed production and transport and logistics systems unclogged post-pandemic. Fortescue reported record shipments in FY22, contributing to a net profit after tax (NPAT) of US6.2 billion.  Total dividends per share were $2.07 fully franked. 

Fortescue has expanded its focus to incorporate green energy opportunities through its 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. 

What to look for when buying dividend stocks? 

Not all companies pay their shareholders dividends, so first check whether the company you are considering has a dividend payment history. Provided it checks this box, many investors next look at the price-to-earnings ratio (P/E ratio). This indicates what people are willing to invest for each dollar of earnings. 

The dividend investor will also look at the dividend yield of a share. The yield is calculated by dividing a stock's annual dividend payments by the share price. Of course, the dividend yield can change over time. A high dividend yield is not always good news. A fall in the share price (which could be due to bad news) will increase the dividend yield. 

The dividend payout ratio is a metric used to determine how 'generous' different companies are when paying dividends. It is the ratio of dividends paid to shareholders relative to a company's net income. 

Focusing on dividends can help you maximise your investment returns. Dividend-paying companies typically endeavour to consistently maintain dividends or produce dividend increases, even during economic instability. This means dividend returns can be more stable and reliable than capital gains. Dividends can also provide share price support during periods of economic stress.

Pros of investing in dividend shares

Income stream: Dividend income provides investors with a stream of income to support their lifestyle (or reinvest to make even more dividends). Dividends can also come franked, which helps reduce the tax payable by shareholders. 

Maximise returns: Dividend-paying shares allow shareholders to make returns without trading shares. Investors who buy shares that don't pay dividends rely on share price appreciation and must sell to lock in these gains.  

And the cons

Capital gain potential: Because dividend-paying shares are typically large, well-established companies, they may have less potential for capital growth than smaller, up-and-coming businesses. 

False sense of safety: Dividend stocks are known for being safe, reliable investments – blue chip stocks. However, just because a company produces dividends doesn't automatically make it a safe bet. Companies have even been known to use dividends to placate frustrated investors when the stock price isn't moving.

Are ASX dividend stocks a good investment? 

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. 

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