Michael O'Neill of Investors Mutual reckons it's "time to double down" on ASX dividend shares because lower capital growth is likely not just this year but over the next decade.
Amid global recession forecasts for 2023, it's best for investors to look for income opportunities with good quality stocks that are worth holding over the long term, he says.
This is a better strategy than trying to buy shares at their bottom in the hope of capital gains.
In an article published on the Investors Mutual website, O'Neill says:
…it's incredibly difficult to time the market – so you're usually better off not trying.
Dividends are always important, right now they're critical. … in times like these … it's best to minimise your risks and invest your money where you have the best chance of healthy returns.
For us that means buying and holding shares in quality industrial companies, at attractive valuations, that pay strong dividend yields.
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Why will ASX 300 share price gains be lower?
O'Neill explains:
Capital growth in the next decade is likely to be lower than the last decade.
Ultra-low interest rates and readily available, cheap, money drove a very long bull market. With high inflation and rising rates, that time has passed.
While markets may, or may not, perform well in 2023, what is very unlikely is that we'll enter another long bull market with a similar amount of capital growth.
Dividends 'remarkably reliable'
O'Neill says dividends are particularly important now because they provide more reliable returns than capital gains [and] can act as a safety net during a volatile market.
O'Neill says data from 1998 to 2021 inclusive shows ASX dividend shares provided 51% of overall returns from the S&P/ASX 300 Index (ASX: XKO).
While outperforming capital growth only slightly, annual dividend returns were vastly more stable.
He said:
… the return on capital fluctuates significantly, but dividend returns are remarkably reliable…
[Dividends are] generally a reflection of the company's overall profitability – its financial performance.
So, in periods where the overall sharemarket goes down, an investor's dividends should stay much the same if they have a diversified portfolio made up of quality companies.
Which ASX dividend shares are the best buys?
The upside of a volatile market is "a great chance to pick up high-quality companies at bargain prices".
In a high-inflation environment, O'Neill says stocks with pricing power and rational, low-risk strategic management are good options.
His ASX 300 dividend shares picks include Suncorp Group Ltd (ASX: SUN). The insurance giant is trading on a forward price-to-earnings (P/E) ratio of 12.1 times FY24 earnings (as at 14 December 2022). Its forecast dividend yield for FY24 is 6.8%.
He also likes explosives company Orica Ltd (ASX: ORI) on an FY24 P/E of 16.1 times and a dividend yield of 3.4%.
Businesses that sell essential products and services are also good inflation hedges. O'Neill tips IGA shopping chain owner, Metcash Limited (ASX: MTS) at an FY24 P/E of 11.9 times and a dividend yield of 5.9%.
Companies that can put well-structured contracts in place, ideally with adjustments for inflation, are also good options. Examples include railway owner, Aurizon Holdings Ltd (ASX: AZJ). It has an FY24 P/E of 12.3 times and a dividend yield of 7.3%.
He recommends avoiding overweight positions in commercial property, resources, and other cyclicals.
