Why I'd buy ASX dividend shares with more than just high yields right now

We may live in The Lucky Country, but you need to control your own destiny.

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Many people don't realise the expression "the Lucky Country" originated as a disparaging term for Australia.

The term comes from a 1964 book of the same name written by journalist Donald Horne. 

He was referring to the fact that Australia had become prosperous by dumb luck of having minerals in the ground, rather than due to any talent within the population, or possessing ingenious political and economic systems.

That may be true, but Australian investors are truly lucky.

This is because the ASX is packed with stocks that pay out high dividend yields that other nations can only dream of.

The favourable conditions have come about because of Australia's franking system, which makes dividends hands-down the best way of returning capital to investors.

Beware of dividend yield sirens

Indeed there are dozens of ASX dividend shares that are currently handing out yields in excess of 10%.

Can you even imagine getting back 10% of your investment every year? Sounds pretty fantastic, right?

However, the reality is that such high yields could burn investors badly.

That's because the yield could have become astronomical due to a rapid plunge in the share price. That is, the company and the stock are in decline.

The business could also have zero growth prospects, so offering sky-high income is the only way it can maintain demand for its shares.

Another situation is that the company is eating into its own capital to hand out an excessive amount of income to its investors. This could be taking money away that could be used to further develop the business, or it could even be liquidating productive assets.

So how should you seek ASX dividend shares to buy?

There is not much point receiving 15% in income if you lose half the valuation.

The best way to avoid that calamity is to take a more holistic view of the stock and the underlying business.

The company should be on an upward trajectory and have reasonable prospects of growing its revenue, earnings, profit or, preferably, all of the above.

If that means downgrading your dividend yield expectations down from 12% to 5%, then so be it.

How to increase yield 'naturally' without lifting a finger

If the company has excellent future prospects then you have a better chance that the share price will increase in addition to producing income.

And you know the great news if this happens?

Once the stock price heads up then your dividend yield will also increase.

Let's say you bought a $1 stock with a 5% yield.

If, years later, that stock is now worth $2 and has maintained the yield, it will be paying out 10 cents of income each year.

But you only paid $1, so this means that you are yielding 10%!

Created with Highcharts 11.4.3Nrw PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

A great real-life demonstration of this dividend appreciation over time is NRW Holdings Limited (ASX: NWH).

If you bought the shares right now, you'd be looking at a dividend yield of 5.87%, as it paid out 15.5 cents of dividends in the past year.

But if you bought NRW Holdings five years ago, you would have paid $1.68 for the stock.

That wise investor would now be raking in a tidy 9.2% dividend yield.

How good!

Motley Fool contributor Tony Yoo has positions in Nrw. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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