ASX dividend shares are in big demand at the moment with interest rates being so low in Australia and around the world.
Who knows if interest rates are always going to be this low, but it certainly increases the importance of finding good-quality ASX dividend shares when you're putting a lot of capital at risk.
These are some of the things I look for:
A stable, growing dividend
It may seem obvious, but some people start out by looking at a share's dividend yield rather than a pattern of growing dividends.
Past performance may not be an indicator of future performance, but I think it does show the tendency of the business' leadership to try to provide stable and growing dividends.
Two of the shares best known for their steadily growing dividends are private hospital business Ramsay Health Care Limited (ASX: RHC) and investment conglomerate Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). And those dividends could keep going higher and higher as time goes on.
Less than 100% dividend payout ratio
One of the most important factors for businesses to grow is re-investing for future profit, that's what helps compound profit at a good rate.
But if a business is paying out more than 100% of its profit then it's draining its profit reserve and taking away from the strength of the balance sheet.
It's not sustainable for a business to keep paying more than 100% of its earnings, either the dividend is going to be cut at some point, or earnings will improve. Sadly that's what happened to Telstra Corporation Ltd (ASX: TLS), which is why I never thought of it as a very reliable dividend share.
Long-term growth prospects
Obviously we also need to pay attention to the growth potential of the business. If the profit isn't growing then the dividend can't keep going up either.
The AMP Limited (ASX: AMP) dividend is a prime example, the profit went lower and so went the dividend.
But it's businesses like REA Group Limited (ASX: REA) and Altium Limited (ASX: ALU) that have long growth runways and their dividends continue to grow every year.
Relatively shielded from competition and technological change
You want your dividend shares to have a good moat or be protected from technological change.
That's why irreplaceable asset businesses like Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD) and APA Group (ASX: APA) can generate such reliably consistent cashflow each year abd why they're attractive to income investors.
It's also why shares like Rural Funds Group (ASX: RFF), Viva Energy Reit Ltd (ASX: VVR) and Arena REIT No 1 (ASX: ARF) can continue to generate good cash returns for shareholders year after year – their income is reliable, although it won't go up fast either.
