The world of ASX dividend investing has been turned on its head in 2020.
Due to the impacts of the coronavirus and its associated economic shutdowns, companies left and right have been altering their dividend policies. Some have 'suspended' or 'deferred' their dividends, others have cancelled them outright.
Former dividend heavyweights like National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are unfortunately amidst this group, as are Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD) and Ramsay Health Care Limited (ASX: RHC)
But a small group have flagged keeping their dividend steady or even raising it. So what's the secret sauce for a great dividend share?
Well, I've come up with 3 key metrics to keep an eye on when choosing a winning ASX dividend share.
Payout ratio
The payout ratio is a metric that tells us how much of a company's earnings (read profits) are paid out as dividends. A low payout ratio tells us that dividends are easily covered by the company's cash flow and are therefore less likely to be endangered by a 'black swan' event or a recession.
When I look at a company like CSL, I can see its payout ratio comes in at around 42% – which is a healthy level in my view and indicates a winning dividend share. In contrast, Commonwealth Bank of Australia (ASX: CBA) has a payout ratio of over 94% – indicating dividend cuts are well and truly on the cards in the near future.
Competitive advantage
If a company has a competitive advantage or is a leader in its area, it typically indicates the company is on a sound financial footing and is more likely to grow its dividends in the future – even if it's in a cyclical industry.
Take Brickworks Limited (ASX: BKW). Brickworks is one of the major suppliers of building materials in Australia. Even though the building and construction industries are highly cyclical, Brickworks has managed to grow its dividends consistently over the past 2 decades, even through the GFC.
Low debt
Some companies naturally operate with higher levels of debt than others. This is a completely normal function of capitalism, but it is worth paying attention to if you invest for dividends.
Debt is one of the most certain things you can know about a company's future – it always becomes due and payable at some point. And if a company has to pay the debt off at a time when its cash flows might have dried up, it might do so at the expense of dividends. That's partly why the ASX banks are not paying out nearly as much in 2020 as they were in 2019.
So if you want true dividend certainty, look for companies with little or no debt required for their day-to-day operations. Something like Coles Group Ltd (ASX: COL) springs to mind here.
