The most consistent ASX dividend stocks

It’s that time again, Income Series. The editors at Livewire always give me the deep data dive topic because they know I love nothing more than to bury myself in wads of data in a great big spreadsheet (I know some of you will understand!). This year, it looks like I have reprised my topic from the last series of Most Consistent Dividend Yield.

Aussie investors love their dividends, so I really want to get this one right. I’ve had a year to think about how I’m going to tackle the research, and upon reviewing last year’s offering, I think I can do better. The main issue with any research is to correctly define the problem – define the problem, define the solution – so to speak.

This article will take you through my thought process on how I did this and the resultant research, with the aim of delivering to you the ASX’s most consistent dividend stocks. Let’s dive in.

What is a consistent dividend yield?

To answer this question, let’s start with the definition of dividend yield (DY). It’s simply the share price (SP) divided by the dividend amount over the last 12 months in dollars (D).

DY = SP / D

So for example, if SP is $10 and D is $0.50, DY would be:

$10 / $0.50 = 5% p.a.

Of course, this is a trailing 12-month dividend yield and there’s no guarantee that the next 12-months will maintain the same D, and therefore the same DY, for a stock purchased at today’s SP. One could use forecast data, e.g., from a broker or an estimates service, but this is potentially only a smaller leap of faith.

What constitutes a good outcome from the DY equation is one of the most misunderstood concepts in investing. A single minded focus on DY alone risks the substantial underperformance of one’s portfolio. In my 30-plus years of helping Aussie investors achieve better outcomes, this is one of the biggest mistakes I’ve seen – the focus on dividend yield to the detriment of overall performance. This is because for many investors, a high dividend yield is often used as a justification for holding poor performing stocks from a capital return perspective.

Consider an investor whose main goal is to build a portfolio of stocks that yield 5% p.a. fully franked year in year out for 20 years. For example, in Year 1 they buy 10 stocks each with a SP of $10 and D of $0.50:

$10 / $0.50 = 5% p.a. ✅

And in Year 20 each stock looked like this (I know, it’s an extreme example, but bear with me here!):

$1 / $0.05 = 5% p.a. ✅

Each stock has the same dividend yield today as it did 20 years ago, i.e., a consistent dividend yield that met the investor’s criteria. But each has lost 90% of its value (yes, much of this would be due to the payment of the dividends themselves, but clearly the companies chosen didn’t grow their earnings sufficiently to warrant their SPs appreciating enough to compensate).

The DY equation demonstrates that if DY is UP over a period, it could have been because:

• SP is DOWN vs:

• D is DOWN at slower rate = BAD 👎
• D is SAME = BAD 👎
• D is UP = BAD 👎 (still bad because SP is falling!)

• SP is SAME vs:

• D is UP = OKAY ⚖️ (it depends on how much importance you place on the opportunity cost of owning this stock compared to other stocks that may have delivered a higher “total return” during the period for the same risk)

And if DY is DOWN over a period, it could have been because:

• SP is UP vs:

• D is UP at a slower rate = GOOD 👍(SP and D rising!)
• D is SAME = GOOD (SP is rising!)
• D is DOWN = BAD OR GOOD 🤔? (BAD unless the company is retaining more D to reinvest back into the business for improved future earnings, therefore potentially yielding a substantially larger SP down the track. So, this scenario COULD BE GOOD 👍, too!)

• SP is SAME vs:

• D is DOWN = BAD 👎 (most likely an opportunity cost here, but perhaps as in the last scenario, the company is shifting toward a reinvestment strategy for improved future earnings…then potentially GOOD 👍)

This is what I’m going to call the “Capolingua: Dividend Yield Good / Bad / And Possibly Good Matrix”. Let’s just call it the “Matrix” for short.

What does the Matrix mean for finding the most consistent dividend paying stocks? It looks like all the 👍 sat in the DY is DOWN basket. Wait a second, a falling DY is good? How can that be? 🤔

Because in these scenarios, the SP was rising, and the more it rises, the better the likely outcome. As investors, our main aim should be to ensure that the total return (i.e., dividends and capital gains) of our stocks outpaces our minimum required return (this could be beating a benchmark like the ASX 200, or a fixed amount like “I need to grow at 7% p.a. after tax to reach my retirement goal”).

Now, I know you’ll have your own opinion based on your investing biases – some of you just want to see 5% p.a. fully franked and don’t care what the share price is doing…”Carl, I’ll never sell my bank shares…they’ve given me great dividends over the years (ignores multi-year periods of falling SPs) and you’ll have to pry them out of my cold, dead hands old boy…Enough of your total return mumbo jumbo!”

Okay, I get it, you love fully franked dividends and nothing I say is going to change that. But for investors who want the best total return with the least volatility (i.e., consistency), then this research is for you.

How to calculate dividend consistency

So, I propose that looking at DY alone is pointless. We must also incorporate SP into our analysis. This got me spit balling a few different ways of conducting the analysis.

Dividend consistency calculation method candidates:

1. Look at the volatility of D over the last 20 years, show the stocks with the highest risk-adjusted D

Nope, useless. The Matrix says a steady D could occur with a plunging SP, and therefore resulting in a terrible total return. 🚫

2. Look at the volatility of the average DY over the last 20 years, show the stocks with the highest risk-adjusted DY

Okay, so bring SP into the equation? DY = SP / D, remember? Yes, but looking at average DY over time, particularly over a longer lookback period like 20 years, is also a little pointless. This is because over such a long period of time, growth stocks that typically start with no or a very low DY would be penalised, despite potentially having a very solid DY more recently. 🚫

3. Look at the total return over the last 20 years, show the stocks with the highest risk-adjusted total return 🚫

Getting warmer, but fails to take into account that some investors require a minimum DY to fund their regular income requirements. So, it’s possible that using this method we find the most consistent stocks on a total return basis, yet none are very good dividend payers because they chose to reinvest their earnings back into their businesses to power even higher future earnings.

4. Look at the total return over the last 20 years of stocks that paid a dividend within the last 12 months (to account for growth stocks), and whose trailing 12-month dividend yields is greater than a hurdle rate 🤔

This sounds reasonable. But what hurdle rate should we use? Any yield at all, or just high yielders, e.g., >5% p.a., or something else? What about franking credits?

Okay, I think we’re getting warmer here, and as the little girl in that tacos commercial said: Why not have both!? Let’s look at grossed up DY, i.e., DY grossed up for franking credits “GDY”, and run two cohorts:

• One cohort that ranks stocks by risk-adjusted return with dividend yields of <5% p.a. This will allow every major ASX growth stock with any dividend to shine; and

• One cohort that ranks stocks by risk-adjusted return with dividend yields of >5% p.a. This will allow every major ASX income stock to shine.

Sounds good to me. Okay, now I need to go and do a great deal of number crunching! 🤓

The most consistent ASX dividend stocks

Before we get to the results, let’s just lay down some foundations for how to interpret them. First, the universe for my research is the ASX Top 100, of which 88 have paid a dividend in the last 12 months. Given the laborious task of sourcing, combining and organising monthly dividend, price, and returns data, this time I elected to limit my research to the Top 100, but note, this is up from last year’s Top 50. Yes, the next logical step is to do the whole ASX 200 next year!

To understand the results, you’ll also need to do a little background reading on some of my other data deep dives here on LiveWire. It’s best to start with how I like to measure consistency. I do so using the Sortino Ratio, which is discussed extensively in this article on the Most Consistent ASX ETFs for Growth & Income.

For me, consistency means considering both return and risk, and this means calculating an asset’s risk-adjusted return. The Sortino Ratio is the industry standard for risk-adjusted return because it focusses on an asset’s downside, or “adverse” volatility, without penalising its upside, or “beneficial” volatility. This makes it a good measure of how sound an investment is – not just by how much money it makes – but by how safely it makes that money.

When comparing Sortino Ratio values, one should consider both absolute and relative values:

• Absolute value: A Sortino Ratio of 1.0 represents a fair risk versus reward, i.e., 1 unit of downside risk corresponded to 1 unit of return above the “minimum acceptable return” (MAR). (The MAR is a benchmark return that the asset’s returns are compared to, I have used 6% in this research – typical for stock investments).

• Relative value: Sortino Ratios can be used to compare the risk-adjusted returns for similar assets, i.e., a higher Sortino Ratio indicates a greater return for each unit of downside risk taken, relative to peers with lower ratios.

The next item is grossed up dividend yield (GUDY). Grossed-up dividend yield accounts for any franking credits attached to a company’s dividend, and therefore represents an after-tax yield. It’s important to compare dividends based on grossed-up yields as it is a fairer representation of the true benefit of a company’s dividends. For more information on dividends and dividend strategies, check out this 2-parter on the topic I wrote earlier in the year.

Finally, as you’ll see in the tables below, the third column is compound annual growth rate (CAGR). This is a return measure that shows the average yearly return of an investment over time, assuming profits are reinvested each year. For example, suppose a $1 investment returns 10% p.a. for 3 years. The end result would be $1.33 if the returns are reinvested each year or $1.30 if they’re not. In the first scenario, the investment’s CAGR is 10% p.a., but in the second it would be just 9.1% p.a.

It’s important to note that my CAGR calculations take into account capital gains and dividends, and therefore represent the total return performance over the last 20-years (or as long as the stock has been listed on the ASX if this is shorter). The CAGR data you’re about to see below represent the return experienced by investors who reinvested all dividends earned during the lookback period.

Okay, let’s look at the results. Here are the most consistent dividend paying stocks in the ASX Top 100. Let’s start with the “high yield” cohort, i.e., those stocks that have a trailing 12-month grossed up dividend yield of greater than 5%.

Fortescue (ASX: FMG) retains its top spot from last year’s study with a trailing 12-month grossed up dividend yield of 13.3%. This sounds like a fantastic yield, but I note that FMG’s share price plunge over the last 12-months means investors lost 29.3% on a total return basis (capital and dividends). Still, if we consider FMG’s long term performance, its 20-year CAGR of 23.6% p.a. is very respectable – both against its peers in the high yield cohort and against the benchmark ASX 200 Total Return Index (XJOA) at 9.6% p.a..

But, as we have noted earlier, return without risk is irrelevant. On this basis, FMG’s Sortino Ratio of 0.69 suggests that its return was earned with a greater amount of underperformance against our 6% MAR than outperformance. Still, FMG’s 0.69 is the best in the high yield cohort and it’s also better than the XJOA’s dismal 0.20.

I note that only FMG and No. 2 Atlas Arteria (ASX: ALX) were the only two of the high yield cohort that beat the XJOA on all three performance metrics – but neither could be considered an all-round performer due to their sub-standard Sortino Ratios. On a risk adjusted basis, neither FMG or ALX could cut it.

Indeed, if we look further down the list, we see a group of “blue-chip” stocks that most average investors would probably tell themselves are top-notch, “safe” dividend stalwarts. Granted, most on paper show a high dividend yield, but in terms of total return – and particularly total risk-adjusted return – they have been terrible investments over the last 20-years! The vast majority of the high yield cohort delivered inferior returns compared to the XJOA, and they did so with outsized relative risk.

A disappointing result in terms of finding the ASX’s most consistent dividend stocks so far! Now for the “low yield” cohort. These are the dividend paying stocks in the ASX Top 100 that have a trailing 12-month grossed up dividend yield of less than 5%. (Hint: What we’re about to see is that low yield doesn’t mean low risk-adjusted returns!)

The data clearly suggests that dividend paying stocks with lower yields have superior returns on an absolute basis (i.e., we’re seeing far greater CAGR outperformance compared to the XJOA), and on a risk-adjusted basis (i.e., we’re seeing far higher Sortino Ratios).

Taking out the first five spots in order are: REA Group (ASX: REA), Wisetech Global (ASX: WTC), Technology One (ASX: TNE), Pro Medicus (ASX: PME), and The A2 Milk Company (ASX: A2M). I note these five in particular, because they’re the only five out of the 88 dividend paying stocks in the ASX Top 100 that have a Sortino Ratio over the 20-year lookback period of greater than 1 – i.e., they delivered more excess return above the 6% MAR than downside volatility below it.

The total, absolute returns for these stocks are also substantially better than the high yield cohort, with CAGR’s ranging from TNE’s 24.1% p.a. to WTC’s whopping 43.5% p.a. These aren’t just the best dividend paying stocks in the ASX Top 100 over the last 20-years, they’re some of the best stocks, full stop.

“Um, Carl (tentatively raises hand from back of the class ✋), but the dividend yields of this bunch aren’t very high…I mean, 0.2% p.a., that’s not going to pay my bills mate!”. I get it. The average dividend yield among this cohort’s top 10 is a modest 1.7% p.a. – not what most Aussie income investors would consider a substantial, or even a sufficient dividend yield. But, I wasn’t asked to find the highest yielding ASX dividend stocks – I was asked to find the most consistent!

I showed you the high yielders: The data clearly suggests they were generally terrible investments over the last 20-years. They not only failed to beat the market, but the sub-standard returns they did deliver, came with outsized risk. The problem is that most Aussie investors overlook inferior share price performance because twice a year they get what they think is a juicy dividend check.

Conclusions

Different investors will have different perceptions of what constitutes “consistency”. Some just want to see a +5% dividend rolling in year-in-year-out, happy to overlook potentially disastrous absolute and relative performance. Others, like me, want to invest in the best stocks on a risk-adjusted total return basis, i.e., the best possible mix of capital gains and dividends, earned with the lowest risk.

The data I have presented here suggests that the higher dividend yielding stocks in the ASX Top 100 generally failed to beat the broader market on a total return basis, but also on a risk-adjusted basis. It also suggests that stocks with lower dividend yields tended to deliver superior total returns and superior risk-adjusted returns.

As far as investing in the most consistently performing ASX dividend stocks, investors are better off looking for those with lower and not higher dividend yields.

But why?

Coincidentally, I’ve written about this topic in the recent past, also. In this article on what are the common traits of the ASX’s best growth stocks, I explore how the best performing stocks are those with the highest earnings growth. These companies typically pay very low, or no, dividends because they prefer to retain earnings to reinvest back into generating even greater earnings growth down the track.

On the other hand, companies that pay high dividends tend to be more mature companies operating in markets and industries that have fewer growth opportunities. By paying high dividends, the management of these companies are essentially saying, “We can’t find anything great to do with this cash, here…you have it!”. So, just as companies with higher earnings growth rates tend to deliver higher share price performance, the opposite is true for companies with lower earnings growth rates.

This is why in my experience, and also seemingly confirmed by the data here, high dividend companies are those at greatest risk of missing earnings expectations, and therefore delivering poor share price performance (and by extension deliver poor total returns). The data also suggests that higher dividend / lower earnings growth combinations tend to lead to greater downside volatility in general (i.e., they have lower Sortino Ratios).

So, what are the most consistent ASX dividend stocks? Well, as for the Top 100 (and a reminder I hope to expand this research to the Top 200 next time), if I had to narrow it down to a Top 6 “balanced” cohort – i.e., the 6 best on the basis of grossed up dividend yield, CAGR, and Sortino Ratio, it would be:

1. REA Group (REA): Sortino 1.42 (excellent), GUDY 1.3% p.a. (not awful!), CAGR 29.4% (excellent)

2. The A2 Milk Co.: Sortino 1.03 (solid), GUDY 1.2% p.a. (not awful!), CAGR 30.4% (excellent)

3. JB Hi-Fi (JBH): Sortino 0.66 (fair), GUDY 4.6% p.a. (very solid), CAGR 19.4% (solid)

4. Wisetech Global (WTC): Sortino 1.24 (excellent), GUDY 0.3% p.a. (not everyone’s cup of tea!), CAGR 43.5% (FAANGs-style excellent!)

5. Technology One (TNE): Sortino 1.16 (solid), GUDY 0.8% p.a. (not everyone’s cup of tea!), CAGR 24.1% (excellent)

6. Pro Medicus (PME): Sortino 1.03 (solid), GUDY 1.2% p.a. (not awful!), CAGR 33.2% (excellent)

I bet you didn’t start out reading this article thinking you'd see Pro Medicus in a list of most consistent ASX dividend stocks! And, you’ll no doubt have your own opinions on the best picks from this research because your investing goals and desired mix of income versus capital are likely different from mine. Regardless, I trust that this research has both enlightened and challenged you with respect to what actually constitutes a consistent dividend stock and how to find them.

(Always keep in mind that past performance is not a predictor of future performance, the data presented here is exclusively historic. Future returns are likely to be different from historical returns. Do your own research to determine the pros and cons of investing in any stock, or seek professional advice to determine which stocks are most appropriate for you.)