Dividends can be a major consideration when investing, even more so now that interest rates are at record lows. For some investors they provide a liveable income, for others, dividends can be reinvested to expand their portfolio.
But investing for dividends can be tricky – after all, dividends aren't guaranteed.
Just look at AMP Limited (ASX: AMP), which cut its dividend to zero in September. The big four banks have traditionally paid regular dividends, but are facing their own headwinds, post-Royal Commission.
Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB), and Australia and New Zealand Banking Group (ASX: ANZ) are all facing increased regulatory costs and heightened competitive pressures from the dawn of the Open Banking regime.
NAB recently cut its dividend from 99 cents to 83 cents. ANZ cut its dividend in 2016 and it has remained at a steady $1.60 ever since. Likewise, Westpac's dividend has remained at a steady $1.88 per share since 2016.
Most investors want more than dividends alone though – they also want some prospect of capital growth, especially over the long term.
Telstra Corporation Ltd (ASX: TLS) has long been known as a dividend share, but has little to report in the way of capital growth. And even Telstra has had to cut dividends of late, reducing its full-year dividend to 16 cents per share in 2019, compared to 22 cents per share in 2018 and 31 cents in 2017.
ASX shares with increasing dividends in 2019
So, which shares have offered decent dividends with the potential for capital growth this year?
Well, 2019 has been the year of the miners, with skyrocketing iron ore prices pushing returns on mining stocks higher. Iron ore prices reached a peak of over US$100 per metric tonne in July, up from a low of around US$80 in April, before stabilising to around US$90 today.
Here's a closer look at 3 of the top ASX iron ore miners and how their dividends have fared this year.
BHP Group Ltd (ASX: BHP)
BHP increased its September dividend by $638 million. With the exception of 2016, when BHP axed its progressive dividend policy, the miner has increased its dividend every year since 2010. The September 2019 dividend of $1.13 per share (fully franked) ensured a record full year total dividend supported by US$9.4 billion in underlying profit. The miner currently has an annual dividend yield of more than 5% and a price-to-earnings ratio of ~15.
The BHP share price is currently down to $35.77 from its high of $42 in July this year. The miner performed strongly in FY19, with revenue and profits both up on the prior year. Net debt has been reduced to $9.2 billion from over $16 billion two years prior. BHP's commitment to capital discipline has been effective with unit costs over major assets reduced by 20% since 2014. The Australian mining giant is, of course, exposed to the vagaries of commodities prices so its share price can be volatile.
Rio Tinto Ltd (ASX: RIO)
Rio Tinto increased its dividend by $437 million this reporting season. Like BHP, RIO has increased its dividend every year since 2010 (apart from 2016). Its September 2019 dividend was $3.08 per share (fully franked) giving a dividend yield of ~4.4%.
RIO boasted record interim returns of $3.5 billion in the first half of calendar 2019, bolstered by strong iron ore prices. The share price has declined along with the iron ore price, from a peak of $107 in July down to around $90 now.
Rio Tinto reported net underlying earnings of $4.9 billion, up 12% in the half year to August 2019, while earnings before interest, tax, depreciation and amortisation (EBITDA) was up 19% year on year. Iron ore was responsible for the increase in underlying earnings and EBITDA thanks to favourable movements in prices. Prices for copper and aluminium were, on the other hand, down by an average of 11% and 17%, respectively.
Net debt increased to $5.1 billion from $4.9 billion; however, the miner's net gearing ratio remains at a conservative 10%. According to Rio's August interim results, free cash flow in the first half of 2019 was $3.9 billion, 35% higher than the first half of 2018.
Fortescue Metals Group Limited (ASX: FMG)
Fortescue Metals increased its dividend by $373 million in the second half of FY19. Paying a fully franked dividend of 24 cents per share in October 2019, record total dividends per share of $1.14 were paid in FY19. FMG is currently yielding 4.8%.
The miner has had a stellar year, which has seen its share price more than double. Starting the year around $4.20, Fortescue now trades at around $8.90 following some great results and a commensurate dividend payment. Earnings per share were $1.47 in FY19 with a 78% payout of full year net profit after tax (NPAT), increasing dividends by 396% compared to FY18 dividends, which were 23 cents per share.
Revenue was up 45% in FY19 to US$10 billion with up 90% to EBITDA US$6 billion. NPAT increased by 195% to a record US$3.2 billion as strong margins sustained average realised prices. High iron ore prices contributed to a 48% increase in average revenue received per dry metric tonne compared to FY18, while Fortescue maintained an industry leading cost position.
Fortescue has reduced net debt to US$2.1 billion while cash on hand was US$1.9 billion at 30 June. Gearing has been reduced to 27% from 45% three years ago and no debt is due until calendar year 2022. Fortescue has been returning capital to shareholders via a $500 million on-market share buyback program, which runs through to October 2020.
Foolish takeaway
Dividend shares are usually well-established companies with a track record of distributing profits to shareholders. Investing for yield gives you the chance to create an additional income stream as well as benefit from any capital growth in the underlying shares, and franked dividends can also provide valuable tax benefits.
The stocks discussed above all operate in the mining sector, so they can be cyclical. Commodity price tailwinds, particularly in iron ore, bolstered the miners this year, but demand for commodities is dependent on economic growth. If growth slows and demand drops, revenues and profits will also fall. A recession or trade war could negatively impact these stocks.
Nonetheless, if you're in the market for dividends, you could do worse than these 3 ASX shares, which have provided decent dividend yields over time.
