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Recent sharemarket conditions have not been overly favourable for income investors. Yet, among low-interest rates and waves of market volatility, dividend shares offer a glimmer of hope.

Dividend shares can offer investors a reliable source of passive income and act as a secure foundation to a considered portfolio. The trick is selecting good quality shares that are suited to your risk tolerance and investing goals. 

As we move past sharemarket weakness in September, now is a good time to find some dazzling dividend shares that could be the crown jewel of a savvy, income-focused portfolio.

Takeaways from reporting season

Reporting season is make or break time for dividend shares. The amount payable to investors is announced during reporting and is usually a percentage of a company’s earnings (also called the dividend payout ratio). Usually, the better the company performs, the better the dividends. 

Each dividend has a record date, ex-dividend date and date payable. Dividends are commonly paid out after February half-year results and August full-year results. This is one of the reasons September is traditionally the worst month for equities as dividends are paid out. Additionally, as the third quarter comes to an end, investors historically rebalance their portfolios. 

The 2021 August reporting season was positive, rounding out another bumpy year for local and international markets. Many companies beat market expectations for their earnings and delivered great results for investors. The share price of many out-performers rallied in response to the positive news.

[Editor’s note: Do not read the following commentary as recommendations on stocks or dividends. Do further research of your own or talk to a licensed financial adviser before acting on themes in this article].

Dividend heavyweights in the financials sector stood their ground, with the likes of Commonwealth Bank of Australia (ASX: CBA) providing sizeable dividends for investors. A 19% jump in profit to $8.8 billion in the 2021 financial year meant CBA announced a $2.00 final dividend - more than double the $0.98 per share from the same time last year. 

Suncorp (ASX: SUN) investors also had more to smile about as the Queensland-based bank declared a 40 cents dividend, plus an additional special 8 cents per share dividend and a $250 million share buyback. 

These two examples go to prove the importance of selecting quality shares with strong fundamentals during times of uncertainty as they can help safeguard capital and generate income even in a low-yield environment. 

Hopeful horizon

A few themes are lingering after the recent reporting season. Mainly, investors are wary of Coronavirus curve balls that continue to affect recovery efforts in the market and the economy.

For income investors, it’s a good time to look under the hood and examine how a company has performed through the pandemic to date. There is often a lot to digest but look for strong repeatable cashflows, growing revenue and dividends over time, as these indicate a solid financial foundation.

It is also worth considering the outlook and guidance section of the company’s results, as this can provide insight into the company’s future trajectory.  

Income investors should also consider dividend shares that will benefit from recovering or growing industries. Examples are financials, which Bell Direct expects to be a source of light in 2022 and offer some of the highest dividends, and building material companies. 

If stock picking is not for you, consider Exchange Traded Funds (ETFs) that are focused on dividends. Examples include the BetaShares Global Banks ETF (ASX: BNKS), VanEck Australian Banks ETF (ASX: MVB) and Vanguard Australian Shares High Yield ETF (ASX: VHY): 

  1. BNKS invests in around 60 of the world’s biggest banks like HSBC, Bank of America, and Royal Bank of Canada. If these companies’ shares grow in value, the ETF BNKS should follow suit. The ETF also pays dividends to your account throughout the year. 
  2. MVB invests in seven Australian banks like CBA, Westpac, National Australia Bank, Macquarie Group, Bendigo and Adelaide Bank, and Bank of Queensland. 
  3. VHY is a little different, as it tracks 60 Australian companies with a history of paying higher dividends such as the banks, BHP Group, Fortescue, and Transurban, meaning you get exposure to any potential share-price growth and dividends. 

[Editor’s note: ETFs can also fall in value if shares in an underlying index, on which the ETF is based, decline in value]. 

Not all that glistens is gold 

Income investing - like all investments - has risks. The biggest concern for income investing is the temptation to chase high dividend yields. You can easily get stung by broker fees if you switch your bet too often, or you might not do enough research before committing your funds to a share. 

Dividend shares are also affected by interest rates. Dividends are attractive to income investors while the cash rate is low, but when the Reserve Bank changes gears to increase interest rates, dividends may lose some of their shine as investors look to lower-risk forms of income such as term deposits or bonds. The overall share price may therefore take a hit, reducing dividends as a result. Keep in mind that traditionally when interest rates rise, banks make more money, and their shares can potentially rise over time.

Consistency is key - meaning you should look out for shares that have delivered consistent dividends and overall performance. Typically, companies with growing earnings and cashflow generally also see share price growth, outperform the market over time and offer patient investors great income over the period of their investment.

Savvy investors who take the time to assess their options when it comes to dividend shares have a lot to gain. Providing income and a sturdy addition to a portfolio, dividend shares truly take the income crown.

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The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate (“ASX”). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice.  Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.