Top 10 ASX dividend stocks to watch

ASX dividend stocks: what you need to know

When buying any stock, traders typically benefit in two ways: from capital gains due to an increasing share price, and profit pay-outs in the form of dividends.

Usually, smaller companies in a high growth phase focus on capital growth, using profits to expand operations. Meanwhile, larger established blue-chip companies often choose to focus on dividends, which is a cash payment to shareholders derived from a company’s earnings.

Accordingly, investing in capital growth stocks usually requires more active management to react to market news, while dividend stock portfolios often require less management. Hence, many investors seek out dividend stocks as a source of passive income.

Dividend stock investors view a stock’s dividend yield as the key measure of a stock’s value. It offers an insight into how great the return on an investment will be. To calculate the dividend yield, investors simply divide the annual dividend by the share price.

To begin initial research, IG offers market screeners to filter out ASX stocks with the highest dividend yields.

Investors should then inspect an individual company’s financial status to determine the future viability of its dividend yield. At a minimum, this should include its historical profit generation, debt levels, and prior dividend history.

It’s also worth researching its dividend policy, to see exactly under what conditions a dividend could be paid or withheld.

Best ASX dividend stocks to watch

1) Fortescue Metals Group (ASX: FMG)

Fortescue Metals Group is the fourth-largest iron ore producer in the world, with control of more than 87,000 km of iron ore mines in Western Australia. According to Fitch Solutions, the iron ore price is forecasted to stay above $US100 per tonne into 2023, supporting FMG’s strong dividend.

The miner paid out a dividend of $3.58 in 2021, which may even increase this year as the mining supercycle gathers pace. Of course, iron is a highly cyclical metal, so this dividend stock will require more attention than most.

To capitalize on the strong iron price, the company recently issued a $2 billion notes offering to fund sustainability initiatives and general expenses. CEO Elizabeth Gaines believes it ‘demonstrates the company’s passion and commitment to integrate sustainability into all aspects of our business.’

2) Rio Tinto (ASX: RIO)

Rio Tinto is the world’s second-largest metal producer, producing ‘materials essential to human progress.’ It’s the world’s biggest producer of iron ore, with 17 mines in the Pilbara region alone, operating in the region with its competitors.

However, Rio Tinto is also an important aluminium and copper miner, and demand for both metals is set to grow with demand for electrification. It’s also diversified into diamonds, giving the miner resilience for when metal prices fall.

In 2021, it paid out a record $14.15 dividend. However, this was due to record Chinese demand for iron, which could weaken in 2022 as the country’s real estate sector slows down amid the resurgent pandemic.

3) BHP Group (ASX: BHP)

BHP is the third miner on this dividends list, underscoring the importance of the sector to Australia’s economy. Mining alone is worth 11.5% of GDP, while manufacturing at 6% and construction at 7.4% are both reliant on the larger sector.

BHP specializes in coal, iron ore, manganese, nickel and copper. While iron is yet again its most important product, the company’s diversification is attractive, with copper and nickel at near-record prices.

BHP’s dividend yield is hovering near 10%, but the company’s restructuring towards green mining could see it change its product mix over the long term. The transition will need to be carefully managed to maintain its strong position.

4) Wesfarmers Ltd (ASX: WES)

Originating as a Western Australian farmers’ cooperative, Wesfarmers is a diversified business that covers home improvement, outdoor living, apparel, health, beauty, office supplies, chemicals, energy fertilisers, and industrial products. It owns brands as diverse as Target, OfficeWorks, Kmart, and Bunnings.

The company is one of the largest employers in Australia, and its primary objective is ‘to provide a satisfactory return to its shareholders.’

It has had a poor start to 2022 as consumers begin to pull back spending due to the rising cost-of-living crisis. However, it has an exceptional management team with a history of success. And it expects dividends in FY22 of $1.62 and $1.81 in FY23.

5) Suncorp Group (ASX: SUN)

Suncorp is one of the largest banking, insurance, and superannuation providers in Australia. The financial sector has struggled during 2022, but with Reserve Bank of Australia Governor Philip Lowe widely expected to raise interest rates to combat inflation, Suncorp’s profits could be on the up.

Of course, Australia saw median house prices soar by 23.7% to $920,100 in 2021. And home prices in both Sydney and Melbourne fell last month for the first time in 18 months. Increasing interest rates could cause a financial crisis that hits Suncorp harder than potentially higher repayments on debt.

But its insurance and superannuation divisions make the bank resilient to downturns. And with a $0.74 dividend in 2021, it’s an ASX dividend stock to watch.

6) Stockland (ASX: SGP)

Stockland is an Australian Real Estate Investment Trust which delivers consistent dividend returns through landholdings spanning industrial, retail, and residential interests. The A-REIT recently welcomed Ivanhoé Cambridge and Mitsubishi Estate to its third-party capital platform.

Stockland was initially hit hard by the covid-19 pandemic. But it’s now benefitting from the property boom, setting it up for continued profit for years to come. And as the only A-REIT on this list, exposure to Stockland is an easy way to diversify risk in a dividend portfolio.

Stockland’s 2021 dividend was $0.25, above 2020’s $0.22 but a few cents below its 2019 record. With the global economy reopening as Australia moves away from just-in-time manufacturing, demand for its retail and warehouse space could outpace any falls in its residential property value.

7) Woodside Petroleum (ASX: WPL)

Woodside Petroleum is both an explorer and producer of oil and gas and also Australia's largest independent dedicated oil and gas company.

Woodside’s board has unanimously recommended a merger with BHP’s petroleum business, that will give BHP shareholders a 48% stake in the combined group and turn Woodside into a global top 10 independent producer. Woodside expects to make $400 million in savings from the deal by 2024.

With Russian oil and gas imports banned, and Brent Crude surfing at an elevated price of around $100/barrel, Woodside’s dividend in 2022 could be its strongest yet.

8) Australia & New Zealand Banking Group (ASX: ANZ)

ANZ is an Australian multinational banking and financial services company that is the second-largest bank by assets in the country.

This gives the ASX dividend stock a serious advantage; by dint of its size, it is relatively low risk to invest in. And unlike other banking competitors, it has engaged in share buybacks over the years while maintaining a healthy dividend.

Like Suncorp, ANZ is exposed to the bloated housing market on both sides of the Tasman, as it is the largest home loan lender in New Zealand and third-largest in Australia. With interest rates tightening, higher mortgage repayments must be balanced against the risk of severe recession in both countries.

9) APA Group (ASX: APA)

APA Group is an Australian energy infrastructure business, whose purpose is to ‘strengthen communities through responsible energy.’ The company has a $21 billion portfolio of gas, electricity, solar and wind assets across Australia, which gives it a high level of diversification as the country transitions toward net-zero. However, its crown jewels are its revenue-generating gas pipelines.

This stock is special because it was one of a handful on the ASX that did not cut its dividend during the covid-19 pandemic. Moreover, with its most recent interim dividend declared at $0.25, the company has increased its annual dividend for 10 years in a row. While past performance cannot guarantee future returns, this kind of reliability is exactly what dividend investors look for.

10) TPG Telecom (ASX: TPG)

TPG Telecom was born out of the merger between TPG and Vodafone Hutchison just after the covid-19 pandemic struck. Now the second-largest telecommunications stock on the ASX, its dividend policy is to pay out 50% of net profits after tax.

A serious partnership with Telstra could see both companies take market share from rivals, as TPG will gain access to 3,700 Telstra mobile network assets and Telstra gains access to 169 TPG mobile sites.

As TPG continues to benefit from synergies derived from both the merger and the Telstra deal, dividends could increase substantially over the next few years.

How to trade or invest in ASX dividend stocks

1. Learn more about ASX dividend stocks
2. Find out how to trade or invest in ASX dividend stocks
3. Open an account
4. Place your trade

You can open a position on ASX dividend stocks either through share trading or derivatives trading. Share trading means that you take direct ownership of the stock. By comparison, derivatives trading – such as CFD trading – allows you to speculate on the price movement of a company’s shares without actually taking ownership of them.

For a complete breakdown of the benefits and drawbacks of each strategy, please click here.

ASX dividend stocks: further important information to consider

Many investors add ASX dividend stocks to their portfolios for the long term. While this is a sound investment strategy, it also means that any errors are correspondingly magnified.

One key thing to note is that while these ‘top 10’ dividend stocks are high yielding, this is no guarantee of future success. Investors could have higher success with currently lower-yielding shares in the future.

Another is the concept of a ‘yield trap,’ so-called for high-yielding stocks underpinned by poor financials. If a company issues a higher-than-normal dividend, or its share price falls quickly, it can appear high-yielding. However, the yield is calculated using past figures that do not account for very recent performance.

Many investors are caught out by the siren’s song of ultra-high-yield percentages without considering the whole picture.

Likewise, it’s worth remembering that the highest-yielding ASX dividend stocks are usually so attractive because management chooses to plough all profits into dividends rather than capital growth. Total return includes share price increases as well as dividends.

Moreover, maintaining a high dividend yield often requires a weak balance sheet. This can make navigating through volatile periods (such as a global pandemic or European war) difficult.

Accordingly, higher-yielding dividend stocks usually require more active management, while lower-yielding ones come closer to truly passive income. Similarly, compounding by reinvesting dividends can exponentially increase returns, but many ASX dividend stock investors withdraw their returns to spend every year.

For example, most miners and banks are some of the highest-yielding ASX dividend stocks. But Australian banks stopped dividends completely during the covid-19 pandemic. And mining stocks are dependent on the commodity cycle, and especially on the iron ore price. While demand from China is strong now, any future dent could see dividends cut fast.

It’s also worth noting that most ASX dividend stocks are blue chips with very low chances of the outsized capital gains that ASX growth stocks can deliver. It can make sense to have a mixed portfolio that offers potentially bigger returns in exchange for a little safety.

Finally — and this is crucial — the word ‘diversification’ pops up a lot in this article, and there’s a reason why. Companies with the most resilient dividends are often the ones with diversified interests in their sector.

And investors should take care to spread their money across multiple sectors, to further reduce risk. Piling all of one’s capital into mining stocks might give a stellar return right now, but usually at the cost of a good night's sleep.