Top 10 ASX dividend stocks to watch in July 2023

Generally, investors like to position themselves defensively ahead of a slowdown. With inflation high and interest rates rising, sectors less affected include utilities, consumer staples, energy and infrastructure.

As interest rates peak in the next few months – reducing the comparative value of dividend-yielding stocks – it’s important to review which stocks to keep in the portfolio for 2023 and which to trade out.

ASX dividend stocks: What you need to know

When buying shares, investors typically benefit in two ways: from capital gains due to an increase in share price, and from profits paid out in the form of dividends.

Dividend stock investors view a stock’s dividend yield as a key measure of a stock’s value. It offers an insight into how great the return on an investment will be. To calculate the dividend yield, investors simply divide the annual dividend paid by the share price.

To begin initial research, IG offers market screeners to filter out ASX stocks with the highest dividend yields.

Investors should then inspect an individual company’s financial status to determine the future viability of its dividend yield. At a minimum, this should include its historical profit generation, debt levels, and prior dividend history.

Amongst the screening criteria we use are:

• Dividend yield
• Cashflow
• Dividend growth over the last five years
• Market price correlation (beta) based on monthly price movements over the past five years
• Outlook for the next 12 months based on a slowing economy and interest rates peaking

How to trade or invest in ASX dividend stocks

1. Learn more about ASX dividend stocks
2. Find out how to trade or invest in ASX dividend stocks
3. Open an account
4. Place your trade

You can open a position on ASX dividend stocks either through share trading or derivatives trading. Share trading means that you take direct ownership of the stock. By comparison, derivatives trading – such as CFD trading – allows you to speculate on the price movement of a company’s shares without actually taking ownership of them.

For a complete breakdown of the benefits and drawbacks of each strategy, please click here.

ASX dividend stocks: further important information to consider

Many investors add ASX dividend stocks to their portfolios for the long term. While this is a sound investment strategy, it also means that any errors are correspondingly magnified.

One key thing to note is that the below ‘top 10’ dividend stocks are not the highest yielding. These are stocks that appear to have a decent chance of continuing to pay out dividends, although there’s no guarantee of future success. Investors can often have higher success with lower-yielding shares of growing businesses rather than get caught in a yield trap.

Avoiding yield traps

A ‘yield trap’ is a stock with a high yield underpinned by poor financials. If a company issues a higher-than-normal dividend or its share price falls quickly, it can appear to be high-yielding. However, the yield is calculated using past figures that do not account for very recent performance.

Many investors are caught out by the siren’s song of ultra-high-yield percentages without considering the whole picture.

Often yielding stocks either have low growth potential because management pays out all the profit in dividends, or else they are cyclical stocks such as mining companies that can generate enormous amounts of cash and pay dividends for four years, and then generate almost zero cash on the down cycle.

Accordingly, higher-yielding dividend stocks usually require more active management, while lower-yielding ones come closer to truly passive income. Similarly, compounding by reinvesting dividends can exponentially increase returns.

Diversifying to spread risk

It’s also worth noting that many ASX dividend stocks are blue chips with very low chances of the outsized capital gains that ASX growth stocks can deliver. It can make sense to have a mixed portfolio that offers potentially bigger returns in exchange for a little safety.

Finally, it’s important to consider the concentration or diversification of a company’s interests and revenue. Companies with the most resilient dividends are often the ones with diversified interests in their sector.

And investors should take care to spread their money across multiple sectors, to further reduce risk. Piling all of one’s capital into mining stocks might give a stellar return right now, but usually at the cost of a good night's sleep.

Top 10 ASX dividend stocks

1. Mercury New Zealand

Mercury NZ generates electricity in New Zealand through nine hydro generation stations, five wind plants and five geothermal generation stations.

New Zealand is aiming to reduce reliance on natural gas and coal. The approach New Zealand has taken is with tradable carbon credits, which create a market mechanism aimed at reducing carbon emissions as efficiently as possible.

Over time, the government raises the cost of buying carbon credits, which increases the incentive to reduce emissions. This could phase out coal and natural gas and drive up the price of electricity.

As of 22 June 2023, Mercury New Zealand has a 3.2% dividend yield.

2. Charter Hall Group

Charter Hall is one of Australia’s leading fully integrated property groups. The company operates 1,681 long-leased properties with a total value of approximately AU$83.4 billion.

Unlike REITs, Charter Hall doesn’t own these properties; it leases them out to blue-chip tenants on behalf of its clients. Its largest three tenants are the Commonwealth Government, Wesfarmers and Coles.

Over the last three decades, the company has invested across core real estate sectors – office, retail, industrial & logistics and social infrastructure to be one of the most diversified operations on the market.

As of 22 June 2023, Charter Hall has a 3.8% dividend yield.

3. Elders

Elders provides agricultural inputs to farms including seeds, fertilisers, chemicals, animal health products and agricultural services, among others.

The war in Ukraine helped push up the prices of corn, wheat and beef for much of 2022, which should long-term help Elders maintain its growth. The company has had a golden run of growth and rising dividend pay-outs, though it is currently fighting two headwinds; long-time CEO Mark Allison is leaving and recent H1 results were financially weak.

As of 22 June 2023, Elders has a 8% dividend yield.

4. McMillan Shakespeare Limited

McMillan Shakespeare provides financial services to large organisations (government, private and non-profit) in Australia, New Zealand, and the UK. The financial services include novated leasing (leasing a car through an employer), salary packaging, asset management and disability plan management, among others.

This is a stable industry that is growing slowly in these three countries’ service-based economies.
When heading into economic uncertainty, a company in a stable industry is more likely to be able to maintain dividend payments.

As of 22 June 2023, McMillan Shakespeare has a 7.9% dividend yield.

5. Woolworths

Woolworths is one of the leading supermarket chains in Australia and New Zealand. The company operates 1,087 Woolworths supermarkets and Metro Food stores in Australia and 190 countdown supermarkets in New Zealand. It also operates 176 Big W discount merchandise stores.

Keeping costs low is key to profits at the generally lower-priced end of the food retail business. To this end, Woolworths has halfway through a supply chain transformation that has added seven distribution centres since 2019 and will add four more over the next three years.

Woolworths has grown its sales consistently over the past four years, with 1H2023 sales up 4% over 1H2022 and an average of 7.5% since 1H2020. While the current yield is relatively low, the stock can also be considered comparitively safe.

As of 22 June 2023, Woolworths has a 2.5% dividend yield.

6. Transurban Group

Transurban is a toll road development and holding company. It operates 22 toll roads in Sydney, Melbourne, Brisbane, the Greater Washington area, and Montreal. Toll roads are an extremely boring business that earns very predictable revenues.

One thing that stands out about Transurban, however, is that it is protected against inflation – and may even benefit from it. As of 31 December 2022, 68% of Transurban’s revenue was indexed with CPI and 27% escalated automatically at 4.24%.

Transurban benefits because the main drivers of inflation – housing, recreation, food and beverages and household equipment – have no impact on its cost base.

As of 22 June 2023, Transurban has a 3.6% dividend yield.

7. Santos

Santos explores, develops, produces, and transports natural gas and liquids in Australia, PNG and Timor, and has an oil development asset in Alaska.

Santos is a natural gas play with 88% of its reserves being natural gas and natural gas liquids. Around 25% of its reserves are onshore Australia, where they are benefiting from high gas prices. The rest are offshore Australia and Papua New Guinea and are destined to be sold as Liquefied Natural Gas (LNG).

LNG prices were recently elevated by the Russian invasion of Ukraine, though have since fallen back during the summer months.

As of 22 June 2023, Santos has an 3% dividend yield.

8. Brambles

Brambles is better known as CHEP – the company that owns the iconic blue pallets. Originally just a pallet company, Brambles operates as a supply chain logistics company focusing on the management of pallets, crates and containers.

Brambles operates through CHEP North America and South America, Chep Europe, Middle East, Africa and India and CHEP Australia. Even as the economy slows, management of pallets, crates and containers remains an essential service.

Even during the supply chain problems of the pandemic, Brambles improved its revenue each year from $4.6 billion in 2019 to $5.6 billion in 2022.

As of 22 June 2023, Brambles has an 2.5% dividend yield.

9. Ampol

Ampol imports, refines and distributes petroleum products in Australia and New Zealand. As the operator of one of Australia’s two remaining refineries (down from 20 in 2000), Ampol has been the beneficiary of subsidies from the federal government which is concerned about energy security.

In addition, with the closures of ExxonMobil’s Altona Refinery in 2020 and BP’s Kwinana Oil Refinery in 2021, there appears to be less domestic competition.

Ampol’s refining margins hit a record US$33 per barrel in Q2 2022, up nearly five-fold from Q2 2021.
The outlook for Ampol seems positive given that over half of the company’s sales by volume come from diesel fuel, and according to the Department of Energy’s most recent report, diesel fuels sales hit a record 2.8 billion litres in November 2022.

As of 22 June 2023, Ampol has a 7.5% dividend yield.

10. Whitehaven Coal

Whitehaven Coal operates four coal mines in New South Wales and Queensland and exports coal to countries in Asia. Whitehaven exports both high-value metallurgical coal (for making steel) and lower-value thermal coal for electricity generation.

Over the past year – and possibly into the future – the big story has been thermal coal prices.

There’s been a lot of talk about closing down coal-fired power stations in the west. However, China didn’t get the memo. China added 198 GW of new coal-fired power plants in 2021 with another 260 GW in the pipeline, according to E3G. For comparison, Australia’s total coal-fired power capacity is just 24.7 GW.

As of 22 June 2023, Whitehaven Coal has a 10.7% dividend yield.