Yesterday evening we learned that APRA had written to ASX banks asking them to reduce their dividends. Where are investors meant to get their fully franked dividends?
It seems certain that 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) will be forced to reduce their dividends because of the impacts of the coronavirus.
Where are retirees meant to turn?
I think fully franked dividend shares are the answer:
Brickworks Limited (ASX: BKW)
When times are rough I think dividend investors should focus on shares that offer defensive or uncorrelated returns with an existing attractive income record.
Brickworks is one of those very stable businesses. It has maintained or grown its dividend every year for over forty years. Its dividend has been reliable longer than every millennial has been alive. It's a great record.
How has it managed it? It is thanks to its diversified business operations. As its name suggests, it's a brickmaker – the market leader in Australia. It also offers a number of other building products in Australia like masonry & stone, roofing, precast and cement.
It also owns a number of brick plants in the US after recent acquisitions.
Obviously the construction sector doesn't seem in a fantastic position at the moment, but that's okay. It has other assets which make up the entire value of Brickworks' market capitalisation, even if you total exclude the building products divisions.
Both its 'investments' and industrial property trust assets provide reliable earnings and cashflow to Brickworks each year. That's how Brickworks was able to increase its recent FY20 half-year dividend by 5% despite the market uncertainty.
Brickworks currently has a fully franked dividend yield of 4.3%.
Duxton Water Ltd (ASX: D2O)
Duxton Water offers very uncorrelated returns compared to the typical ASX business. It purely owns water entitlements and leases them out to agricultural businesses.
We all still need to eat food whether we're in lockdown or not, and water is an integral part of the agricultural process.
The dry weather has been supportive for water prices over the past couple of years, which has allowed to Duxton Water to steadily grow its dividend every six months.
The Duxton Water Board has pencilled in two more dividend increases for a 2.9 cents per share dividend for September 2020 and 3 cents per share for March 2021. That brings the expected forward fully franked dividend yield to 4.6%.
As a bonus, Duxton Water said its post-tax net asset value (NAV) per share at the end of February 2020 was $1.77, which is a discount of 28% to the current share price. That's a very healthy margin of safety. And boss Ed Peter has recently bought shares at close to the current share price.
Future Generation Investment Company Ltd (ASX: FGX)
Future Generation is a listed investment company (LIC) with a couple of major differences to most other LICs. It doesn't charge any management fees or performance fees. Instead, it donates 1% of its net assets to youth charities each year, which are particularly important right now.
What does it invest in? Future Generation invests in the funds of ASX-focused fund managers who also work for free to enable the donations to charities. Each of those funds is invested in a portfolio of shares, so the underlying diversification is strong.
Another benefit is that some of the funds Future Generation is invested in are 'absolute return' funds. Meaning that those funds can short shares as well as investing normally. Shorting means they can make money even if the market is falling.
Future Generation has steadily been increasing its dividend since it started paying one. It currently offers a fully franked dividend yield of 5.5%.
Foolish takeaway
I think all three of these shares look very good value with very good yields, but the yields aren't unsustainably high. At the current prices I'm probably drawn to Brickworks and Future Generation because of their diversified assets.
This top ASX dividend share could be an even better pick for reliability and long-term income.
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Motley Fool contributor Tristan Harrison owns shares of DUXTON FPO and FUTURE GEN FPO. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Brickworks and DUXTON FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
