As interest rates rise – reducing the comparative value of dividend-yielding stocks – it’s important to review which stocks to keep in the portfolio 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 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 make your initial research easier, 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.

Not all dividend stocks are appropriate for all portfolios, so we screened 302 dividend-yielding stocks to find six that may offer unique advantages.

Amongst the screening criteria we used were:

• Dividend yield, defined as dividends paid over the past 12 months divided by the share price on 11 November 2022
• Price/earnings, defined as the share price on 11 November divided by previous full-year earnings
• 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 rising interest rates

The stocks are summarised below as of 11 November 2022.

Top Ten ASX Dividend Stocks for November 2022

1. Elders Limited

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

The war in Ukraine has helped push up the prices of corn, wheat and beef, all of which are significantly higher than in 2019. This should help Elders maintain their growth.

The company has increased sales every year for the past four years and increased dividends every six months for the past 30 months.

Elders has increased dividend payments every six months since 2019 and paid out 50c in the 2022 financial year. As of 11 November, this is a yield of 4.2%.

The current dividend yield of 4.2% appears sustainable and is franked.

2. Kina Securities Limited

Kina Securities Limited provides commercial banking and investment banking services in Papua New Guinea.

Kina has grown rapidly over the past three years, with revenue and profits up 118% and 47%, respectively.

This is a frontier market where risks are generally considered to be higher than in Australia. The upside is that as of 11 November it was trading on a 10.8% yield, unfranked.

3. BHP Group Limited

BHP Group Limited (ASX) is a giant diversified mining and resources company operating on every continent except Antarctica.

The company has benefited from high iron ore, copper, nickel, potash and coal prices over the past two years, which helped boost its net profit to a record US$21.3 billion (A$31.6 billion), or $US4.21 per share. The company paid out a record US$3.25 per share in dividends.

As a diversified resources company, BHP isn’t likely to be significantly affected by a fall in a single commodity. However, a general softening of commodity prices could affect BHP’s profit and dividends.

As recently as 2018, BHP paid out just A$1.35, which would correspond to a dividend yield of 3.7% at a share price of $36.83

As of 11 November, BHP was trading on a dividend yield of 11.6% franked. Lower commodity prices may see this dividend and corresponding yield fall significantly.

4. Southern Cross Electrical Engineering Limited

Southern Cross Electrical Engineering Ltd provides electrical engineering, instrumentation, communication, and maintenance services to large construction projects throughout Australia.

The recent resource boom has helped to propel the company to record revenue in 2022 as it provided services to mining and processing facilities. Another area of growth is in green energy, which requires a high level of instrumentation, maintenance, and communication.

Over the pandemic period of 2020-21, the company expanded profits despite lower revenue. In 2022 revenue jumped 49% over the previous year to $553 million and profits rose 11% to $15.3 million.

Under the new Labor government, with a focus on green energy, there may be opportunities for Southern Cross to further improve both its revenue and profit.

The company has paid out dividends for 10 of the past 11 years, with a 7.5% yield franked as of 11 November 2022.

5. McMillan Shakespeare Limited

McMillan Shakespeare Ltd 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.

Indeed, MMS has paid dividends every six months for the past ten years except for the September 2020 dividend, which the company suspended due to pandemic-related uncertainty. MMS still made a small profit in 2020 and returned to paying full dividends in 2021.

With this sort of record, MMS may be the sort of company to consider taking a look at for long-term dividend earnings.

For the 2022 financial year, MMS paid out 7.4c per share. Based on its share price of $13.15 on 11 November, this is an 8.1% yield.

6. Shine Justice Limited

Shine Justice Limited is a damages-based legal consulting company operating in two segments: Personal Injury and New Practice Areas. The company has 54 branches in New Zealand and Australia.

Shine Justice makes this list because personal injury litigation isn’t as dependent on a good economy as some other sectors. People sue in good times; people sue in bad times. This may explain the low beta value of 0.29.

Shine Justice has been growing steadily over the past three years, with revenue up 21% over 2019 . Significantly, revenue grew every year through the pandemic, perhaps suggesting a level of resilience to recessions.

Earnings, on the other hand, grew by 123% over the same period, implying that the company may have been focusing on more profitable segments.

If the company can maintain this sort of growth, then it may be able to continue raising dividends past the 5.3% as of 11 November 2022.

7. APA Group

APA Group is an integrated energy infrastructure company operating in the electricity and natural gas sectors. It has interests in gas-fired power stations, solar and wind farms, gas storage, gas processing, gas compression, gas pipeline and consumer gas connections.

Importantly, APA has no coal assets, which under the current government’s emissions targets, could be in danger of being closed down.

Natural gas, although seen as a ‘transition’ fuel towards a greener economy, will likely be around for many decades to come. So, APA’s heavy weighting towards natural gas could help its longevity.

The company pays out dividends on a very regular and flat level, with its dividends paid for financial years 2017-2022 being: 43.5c, 45c, 47c, 50c, 51c, and 53c, respectively. This doesn’t guarantee future dividends will continue to rise, but management has clearly established a pattern.

The rapid rise in natural gas prices has hurt APA’s profits as the retail selling price tends to lag wholesale prices. Nevertheless, operating cashflows for the past four years have been over a billion dollars ($1,197 million in FY2022), more than enough to sustain dividend payments of $613 million in FY2022.

The flat cash flow and dividend yield make APA group shares reasonably independent of movements in the broader stock market, with a beta of just 0.07.

The current dividend yield as of 11 November is 5.1%.

8. Rural Funds

Rural Funds Group is an agricultural Real Estate Investment Trust (REIT) that owns Australian agricultural assets which are leased predominantly to corporate agricultural operators.

As these are long-term leases, Rural Funds Group is one of the most uninteresting companies listed on the ASX. For investments, uninteresting can be most attractive.

RFF pays quarterly dividends of 2.9c, and has increased quarterly payments by 1c a year for the past four years. Should the company continue to increase dividends, then its 11 November dividend yield of 4.65% could increase further.

9. Bapcor Limited

Bapcor Ltd is a leading vehicle parts supplier in Australia, New Zealand and Thailand. The company offers both wholesale to trade (80% of revenue) and retail (20% of revenue) through its Autobarn, Autopro, Midas, ABS, and Opposite Lock stores.

There are two reasons why Bapcor is worth looking at right now:

First, Australia’s vehicle fleet is ageing due to supply chain disruptions. As of January 2021, the average vehicle age hit 10.6 years , up from 10.1 years in 2018. Older cars generally require more maintenance and replacement parts.

Second, approximately 90% of revenue is attributable to non-discretionary spending. Non-discretionary spending tends to be less affected by inflation and a slowing economy.

Over the past three years of the pandemic, BAP increased both revenue and profit, and appears well-positioned to continue to deliver superior results.

BAP has also increased its dividends every year for the past eight years, rising from 8.7c in 2015 to 21.5c in FY2022.

Dividends (cents per share)

Based on its share price at 11 November of $6.73, BAP has a current yield of 3.2%.

10. Arena REIT

Arena REIT is a real estate investment trust that manages and develops early learning and healthcare infrastructure properties across Australia. As of 30 June 2022, the company holds 252 early learning centre properties and 11 healthcare properties earning a portfolio yield to the company of 4.91%.

These are long-term leases in the non-cyclical part of the economy. As of 30 June 2022, 83.3% of leases extend beyond FY2034 – over 12 years.

Given the portfolio and lease length, there isn’t a lot that’s likely to happen to Arena – at least on the upside. The main exposure for Arena appears to be potential problems for early learning centres, such as reduced government support.

This is what makes Arena interesting at the moment. The new Labor Federal Government has committed to lifting the maximum childcare subsidy rate to 90% for the first child in care. This increase in the childcare subsidy could mitigate the downside risk to Avera’s income and dividend payments.

Management has increased dividends each year since 2015 in line with earnings per share.

Dividends per share (DPS) and earnings per share (EPS) in cents

Based on the most recent dividends, as of 11 November Arena is trading at a yield of 4.15%.

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.

It is important to be aware that CFDs are complex products that may magnify any potential profits and losses, making them a high-risk trading strategy that could potentially result in the loss of more than your initial deposit.

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 while these ‘top 10’ dividend stocks are high yielding, this is no guarantee of future success. Investors could have higher success with currently lower-yielding shares in the future.

Another is the concept of a ‘yield trap,’ so-called for high-yielding stocks underpinned by poor financials. If a company issues a higher-than-normal dividend, or its share price falls quickly, it can appear 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.

Likewise, it’s worth remembering that the highest-yielding ASX dividend stocks are usually so attractive because management chooses to plough all profits into dividends rather than capital growth. Total return includes share price increases as well as dividends.

Moreover, maintaining a high dividend yield often requires a weak balance sheet. This can make navigating through volatile periods (such as a global pandemic or European war) difficult.

Accordingly, higher-yielding dividend stocks usually require more active management. Similarly, compounding by reinvesting dividends could potentially increase returns, but many ASX dividend stock investors withdraw their returns to spend every year.

For example, most miners and banks are some of the highest-yielding ASX dividend stocks. But Australian banks stopped dividends completely during the covid-19 pandemic. And mining stocks are dependent on the commodity cycle, and especially on the iron ore price. A slowing Chinese economy could affect commodity prices.

It’s also worth noting that most 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.

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