Investors are searching for yield from their investments. It’s tough because the RBA official interest rate is so low.
Not only does the low official rate make it extremely challenging to make any money from bank accounts, but it pushes the dividend yield of ASX shares down if the share prices are sent higher, which most have been.
So are ASX blue chips the answer?
Large Australian businesses are known for being generous dividend payers, historically.
But it’s pretty easy to pay out a big dividend when the economy is doing well. Before 2020, Australia’s economy went through almost three decades with no recession.
But 2020 has seen a swathe of dividend cuts by many of the popular ASX dividend shares.
The big banks of Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) all cut their dividends.
BHP Group Ltd (ASX: BHP), Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD) and Scentre Group (ASX: SCG) also cut the dividend
The telecommunications leader Telstra Corporation Ltd (ASX: TLS) maintained its dividend but suffered a sizeable profit hit.
It’s been a rough year for the large end of the ASX.
Perhaps the dividends will get better from here, but I think 2020 has shown you can’t rely on blue chips for income.
So where to look for dividends?
Exchange-traded funds (ETFs) simply pass through the dividends they receive to investors. So if the underlying holdings cut dividends then the ETF will suffer too.
There some listed investment companies (LICs) that focus on investing in ASX large caps and have been paying reliable dividends for years such as WAM Leaders Ltd (ASX: WLE), Australian United Investment Company Ltd (ASX: AUI) and Australian Foundation Investment Co.Ltd. (ASX: AFI).
But there are plenty of ASX dividend shares that have been growing their dividends for many years including Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), APA Group (ASX: APA), Sonic Healthcare Limited (ASX: SHL), Brickworks Limited (ASX: BKW), CSL Limited (ASX: CSL), Altium Limited (ASX: ALU), Bapcor Ltd (ASX: BAP) and Rural Funds Group (ASX: RFF).
If I were looking for income I’d much rather go for a portfolio of businesses that keep growing the dividend rather than ones that have a risky higher starting yield.
A business that is growing the profit has a much higher chance of growing the dividend too. Many large blue chips are stagnant at the moment.
If I had to pick two ASX dividend shares of the ones I named, then APA and Brickworks look like the two that are best value right now. APA has a distribution yield of 5.2% and Brickworks has a fully franked dividend yield of 3%.
