In this article we discuss:
- What is a dividend stock
- How to calculate the dividend yield
- Key characteristics of a dividend stock
- Top dividend stocks to watch in 2023
What is a dividend stock?
Dividend stocks are generally those which pay above-average dividends and have a consistent history of doing so.
Such stocks may be appealing to investors because they can provide a steady stream of dividend income on a monthly, quarterly or half-yearly basis in addition to potential capital gains.
When it comes to thinking about dividend stocks the first factor that many investors consider is the dividend yield.
How do you calculate the dividend yield?
Top dividend stocks and high dividend yields are often, but not always, synonymous.
The dividend yield of a stock can be calculated by taking the dividends the company paid over the last 12-months and dividing it by the current share price.
While financial data providers like Syfe or Google Finance will display the dividend yield data under company information – it’s nonetheless useful to be able to calculate it yourself.
Here’s an example. In the last 12-months ANZ Group, one of Australia’s largest banks, paid two dividends – one 74 cent interim dividend in December 2022 and one full-year dividend of 72 cents in May 2022.
To calculate the current dividend yield for ANZ Group you would take the last 12-months worth of dividends – the 72 cent interim dividend plus the 74 cent full-year dividend and divide that by the current ANZ share price. Here’s an example:
ANZ dividend yield = 72 cents + 74 cents / A$24.98 = 5.82%
Dividend stocks: key characteristics to watch for
Although there is no golden rule for what constitutes a dividend stock, there are a number of factors worth thinking about when looking for dividend stocks to invest in. To determine the quality of a dividend stock you should consider the following:
Dividend history
Does the company have a consistent history of paying out dividends or increasing the size of dividends overtime?
Australia’s big four banks are a prime example of companies which have paid consistently high dividends. Despite their differences, the big four all have stable earnings profiles and Boards which are accommodative to paying high dividends.
The Commonwealth Bank of Australia for example has steadily increased their dividend payments over the last two decades – raising the dividend from just 20 cents in 1992 to $2.10 in 2022.
Dividend payout ratio
The payout ratio is another important metric dividend investors should pay attention to. Expressed as a percentage, the payout ratio gives investors a view into how much a company is distributing in dividends relative to how much net profit it is making.
FMG is an example of a company which has a clear dividend payout policy. As of 2022, the FMG Board was committed to paying out between 50-80% of net profits to shareholders in the form of dividends – taking total FY22 dividends paid to A$6.4 billion.
Income focused investors should look out for companies with clear dividend payout policies or a commitment to paying out a high percentage of profits as dividends.
Earnings stability
Does the company have consistent and high quality earnings growth?
Given that dividends are primarily paid from company earnings, if a company is seeing significant declines in revenue or earnings, investors might be justified in questioning the sustainability of a company’s dividend.
Dividend focused investors should look out for companies with stable or growing earnings, as this will potentially allow a company to maintain or increase its dividend over time.
Debt commitments
Does the company have a high level of debt or is its debt levels well managed?
If a company has high levels of debt or other financial issues, it’s important to note that a company may potentially stop paying dividends. One prominent example was AMP, which in FY19 elected not to pay a final dividend as the financial firm attempted to shore up its balance sheet.
Generally speaking, it is at the discretion of a company’s board of directors whether they declare a dividend or not.
Share price problems
Finally, because a stock’s dividend yield is determined by dividing dividends paid over the last 12-months by the current share price, if a stock has faced heavy share price declines, dividend yields can become inflated or unrepresentative of a company’s true dividend potential.
Stocks that have high dividend yield due to share price dislocations are often referred to as ‘dividend traps’.
If a company has an abnormally high dividend yield, it’s usually worth doing a bit of extra research into why.
This brings us to our most important point: dividend stocks need to be assessed holistically. What this means is investors should review all the factors we have discussed – from dividend yield, to payout ratios, to company debt levels – as a whole, and not focus on any one factor in isolation.
Top 10 ASX dividend stocks
The table below highlights some of the highest yielding ASX-listed dividend stocks, based on the criteria of ASX-listed companies with a market capitalisation between A$1 billion to A$100 billion and an above-market dividend yield – sorted from highest dividend yield to lowest.
*Data correct as of 7 March, 2023.
This article/webinar is brought to you by Syfe Australia Pty Ltd, AFS representative number 001295306 representing Sanlam Private Wealth Pty Ltd (AFSL 337927). Any information contained here is factual and should not be construed by you as financial product advice. You should consider obtaining independent advice before making any financial decisions. Any reference to an investment’s past or potential performance is not an indication of any specific outcome or profit. We do not intend for any statement made here to relate to the acquisition or disposal of any shares in the companies or other financial products named here.
