How to find a top ASX dividend stock

Lincoln Indicators
Written by

Lincoln Indicators

Feb 19th, 2016
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In this article, Lincoln Indicators discusses:

  • Why generating an income stream is often important for DIY investors, especially retirees and those with self-managed super funds (SMSFs)
  • How the hunt for investment yield has turned many away from cash and bonds to the Australian Securities Exchange (ASX)
  • The window of opportunity in the current low-interest rate environment, and the high-yield free kick on offer to all investors
  • Why fundamental analysis is paramount in finding quality income stocks

For investors needing a reliable income stream, a portfolio of top ASX dividend stocks makes perfect sense.

For Australia’s growing number of retirees, and those nearing retirement, creating a reliable income stream that can last for many years, if not indefinitely, is imperative. As well as being able to meet one’s living expenses and keep ahead of inflation, a good income stream translates to a better quality of life.

For those with a self managed super fund, or any DIY investor really, the Australian share market is a perfect place to achieve that goal.

That’s certainly come into sharper focus in recent years, especially following the Global Financial Crisis, because the dismal interest rate returns on offer from bank accounts and fixed interest products such as investment bonds have been no match for the strong dividend returns from stocks listed on the Australian Securities Exchange (ASX).

As such investors relying on yield have tended to focus on the share market, particularly companies paying high, fully franked dividend yields such as the big banks – ANZ Bank, Commonwealth Bank, National Australia Bank and Westpac – Telstra, and others paying out high income returns. And the hunt for yield has had an added benefit. Because of the strong investor demand for certain income stocks, those holding them have enjoyed good capital gains in the process. The best income stocks have, in effect, become strong quasi growth stocks as well.

But, while high yield returns and growth are always great, the artificial hunt for yield created by low official interest rates won’t last forever. Some stocks may not be able to stay the dividend distance and become what are known as ‘dividend traps’, and as the saying goes, if a dividend yield sounds too good to be true it probably is.

What to look for?

So what companies should you be looking for? How do you as a dividend maximiser investor know whether you are buying into a quality stock or multiple stocks that will be able to maintain a reliable income stream for you over the longer term?

The answer, as always, is about doing fundamental analysis, assessing key financial ratios, to identify the best investments – that is, the best shares to buy.

The three Golden Rules for income stock selection:

At Lincoln Indicators, we define a quality income stock using three very important rules:

Golden Rule #1 – Financial Health: is the company exposed to manageable levels of financial risk? Strong and Satisfactory Financial Health is a must!

Golden Rule #2 – Management assessment: Is there a consistent history of paying dividends per share (DPS) and increasing them? Has this been supported by stable earnings per share (EPS)? If so one can safely conclude the stock is reliable from an income perspective.

Golden Rule #3 – Outlook and forecasts: Will expected stable earnings result in the future dividend continuing to be higher than the market’s yield moving forward?

Outstanding returns for Income focused investors

In Stock Doctor we regard Star Income Stocks as the best place to start in order to achieve a rock solid income portfolio. A Star Income Stock is a financially healthy company that currently pays an annual grossed-up (including franking credits) dividend yield above the market average grossed-up dividend yield and that has been analysed by Lincoln’s in house research team to ensure the likelihood of dividend payments continuing into the future due to its stable earnings (EPS) and consistent dividend distribution policy (DPS).

The performance of Star Income Stocks has been very pleasing for investors since their inclusion in August 2012 proving that healthy quality businesses are best positioned to meet the needs of income seeking investors.

Can they continue to deliver?

As an ASX investor, it’s worth remembering that buying into a company should not be about picking the highest short-term yield. As yield is a function of price, often the historic yield cannot accurately reflect dividend expectations moving forward. Particularly if there have been big swings in share price to the down and upside.

To understand whether an above market yield is sustainable into the future, studying the company’s longer-term form is essential, in particular their ability to generate stable earnings to support the current dividend policy. This is what Stock Doctor does within our list of Star Income Stocks. The end objective is to ascertain whether a company is likely to be able to sustain a strong yield over time.

We will inform our members of any future risk to earnings which may impact dividends by removing it as a Star Income Stock, ensuring that investors are not disappointed with a smaller pay check from their SMSF, and often accompanied by capital decline.

A membership to Stock Doctor will give you:

  • The ability to find the healthiest businesses currently paying dividends
  • Access to our Star Income Stocks, which including dividends have consistently outperformed the market
  • Dividend yields quoted on both a pre- and post-franking basis
  • Detailed historic and forecast dividend information on all stocks on the ASX
  • Or should you want your funds professionally managed with a specific focus on generating an above-market yield with reduced market volatility and the potential for capital growth over the long term, then consider the Lincoln Australian Income Fund

^Disclosure – Star Stock Past performance:

Disclosure – Star Income Stock Past performance: Star Income Stock Past performance: Star Income Stock past performance is calculated by Lincoln by applying the same performance calculation process as the Star Growth Stocks described above with the following exception.

Dividend distributions are incorporated in the calculations. These are reinvested in the specific investments which generate the distribution on the appropriate ex entitlement dates.

Lincoln Indicators
Written by

Lincoln Indicators

Feb 19th, 2016
Related topics
Information in this communication is current as of publication unless otherwise stated. It is provided for educational purposes only and may not reflect current market data or opinion. It should not be relied upon in respect to any current investment decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.

Important: This communication is provided by or on behalf of Lincoln Indicators Pty Limited ABN 23 006 715 573 (Lincoln), as Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167 for information and educational purposes only. This content may contain general financial product advice. It has been prepared without taking account of your personal circumstances and you should therefore consider its appropriateness in light of your objectives, financial situation and needs, before acting on it. Investments can go up and down. Past performance is not a reliable indicator of future performance. Shares and other investments may go up and down in value, and their past performance may not be repeated and gives no guarantee of future performance. Information in this communication was current as at the date of its preparation, unless otherwise stated, and may be subject to change.

You should read and consider our Important Information and our Financial Services Guide (FSG) which sets out key information about the services we provide. Where our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Lincoln Australian Income Fund Product Disclosure Statement (PDS), Lincoln Australian Growth Fund Product Disclosure Statement (PDS) and Lincoln U.S. Growth Fund Product Disclosure Statement (PDS) for the product at before making any decision.

At the date of preparation of this communication, Lincoln, Lincoln Financial Group Pty Ltd or directors, employees and/or associates of these entities "may hold" interests in these ASX-listed companies. Further information about particular stocks held by these entities or persons from time to time is disclosed within the Stock Doctor program and may change at any time without notice.

Lincoln, Lincoln Financial Group Pty Ltd, any directors, employees and agents of these entities, make no representation and give no warranty as to the accuracy of this communication and do not accept any responsibility for any errors or inaccuracies in, or omissions from, this communication (whether negligent or otherwise) and are not liable for any loss or damage howsoever arising as a result of any person acting, or refraining from acting, in reliance on any information in this communication. No person should rely on this communication as it does not purport to be comprehensive. This disclaimer does not purport to exclude any rights under, or warranties implied by, law which may not be lawfully excluded.

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Copyright © 2024 Lincoln Indicators Pty Ltd. All rights reserved.

All financial services are provided by Lincoln Indicators Pty Ltd ABN 23 006 715 573 (Lincoln) as the Corporate Authorised Representative of Lincoln Financial Group Pty Ltd ABN 70 609 751 966, AFSL 483167.

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