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Date : 27/07/2022

These are the Top ASX Dividend Growth Stocks to Beat High Inflation

Dividend stocks are one of the most crowded categories among SMSF and retirees’ portfolios. Typically, ASX investors have relied for years on dividends from the mining and energy sector, especially from iron ore shares. The big commodities players remain attractive despite the recent market correction, with BHP Group (ASX: BHP) and Fortescue Metals (ASX: FMG) offering an annual yield of 9.48% and 17.48%, respectively.

However, Earnings have peaked recently for these companies that depend heavily on the Chinese economy, which is currently facing tremendous challenges with persisting lockdowns and supply chain disruptions. This led to decreasing demands for iron ore, which saw its spot price plunging from US$233/mt in May 2021 to US$121/mt last month, losing nearly half of its value. Clearly, lucrative dividends from the mining sector could be over soon. So, what now? What are the next growth opportunities?

With rising inflation and interest rates, many investors are looking to protect their capital. A commonly held view is that, during such uncertain times, dividend-paying shares offer better income protection and higher returns than their growth counterparts. Hence, owning dividend stocks in your portfolio is one of the best strategies to beat inflation.

The unprecedented quantitative easing and massive expansionary fiscal policy around the world, combined with the global supply chain crisis arising from COVID-19 and the war in Ukraine, have led to heightened concerns about inflationary risks. Not surprisingly, many investors are seeking to hedge their portfolios against those risks. But what is the best way to do it?


Here is what you should consider when looking to grow your income portfolio

Firstly, you have to look for sectors that will outperform in a high inflation environment. Shockingly, consumer prices are forecasted to hit 7% by the end of 2022, so you better get ready before it is too late. We recommend you diversify your portfolio by including the following sectors that traditionally do very well in such economic cycles: financials, consumer staples, utilities, and healthcare. Thus, businesses from these sectors can easily pass on higher costs as price increases and therefore maintain their earnings growth.

Secondly, you have to look for companies within these sectors that exhibit solid fundamentals with growth potential. We have seen surges in commodity prices, transportation costs, supply chain disruptions, and faster-growing wages, to name a few risks. Moreover, some businesses cannot pass on the higher costs, hurting their profit margins and ultimately impacting their dividends distribution.

Most businesses will not be able to pass on their higher costs and will simply have to deal with lower profitability. This may explain some of the dividend drops we have seen in recent months, along with interest rate rises. On a positive note, few names can still grow their earnings and dividends in such an environment, here are our top 3 selections:

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Best & Less Group Holdings Ltd (ASX: BST)

Best & Less is a retail clothing company that also sells footwear and other goods for men, women, and kids. The group is well established and operates 245 stores in Australia and New Zealand, as well as an online platform that is catching momentum. What we like about BST is that the Company is targeting a very clear niche customer segment: mums and families.

Thus, we think Best & Less has a promising future. The business is looking to grow in many ways, including growing its market share of the baby and kids market. BST also intends to improve its apparel offering for women, increase its digital capabilities, and expand its store network. The Company is considering upsizing existing locations and adding between 15 to 25 new stores over the next three-year period.

In our view, Best & Less could see more customers attracted to its value offering if family budgets are getting tighter due to inflation. Accordingly, we expect BST to report sales growth in the fourth quarter of FY22.

How big could Best & Less’ dividend be? We conservatively estimate BST’s dividend yield to reach 11.34% from its current yield of 10.19%.

Shaver Shop Group Ltd (ASX: SSG)

Shaver Shop Group Ltd (ASX: SSG)

Shaver Shop engages in the retail of personal grooming products in Australia and New Zealand. The Company offers electric shavers, beard trimmers, various hair care products for men, and hair removal, hair styling, beauty, and fragrance products for women.

Shaver Shop, at a market capitalisation of $130+ million, is poised to become the market leader of “all things related to hair removal”. Thus, the business is expanding aggressively. Shaver Shop is looking to diversify its product range into other areas like oral care, hair care, massage, air treatment, and beauty categories.

What we can say is that Shaver Shop is a pretty resilient business. Despite all of the impacts of COVID-19 lockdowns, the Company achieved growth in key financial metrics in the first half of FY22. Hence, its total sales grew by 2.8% to more than $127 million. Furthermore, its corporate store online sales increased by more than 37% to $51.6 million.

While Shaver Shop’s half-year earnings per share dropped to 10.6 cents, most importantly, its dividend per share was increased by a significant 40.6% to 4.5 cents per share.

Overall, we are convinced that Shaver Shop is well-placed to benefit from new COVID-19 era customers turning into loyal, repeat customers. What we also like about this Company is that it is ramping up its expansion with new store openings in Australia and New Zealand.

With a dividend payout ratio of 46.47%, we expect Shaver Shop’s dividend yield to remain steady above 9.3%.

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APA Group (ASX: APA)

The APA share price continues to rise despite the broad market sell-off we have been facing since the beginning of the year. APA has returned 9.9% over the last 3 months and 33% over the last 12 months, which is quite impressive.

Regarding dividends, APA expects to pay its shareholders 28 cents per share in September, which is a 12% increase from its previous distribution of 25 cents per share. That means APA is now expecting to pay out 53 cents of dividends for FY22. This marks a 3.9% improvement year-on-year.

The dividend improvement is in line with the Company’s guidance released earlier in its half-year report. The guidance clearly highlights that APA benefits from the current high inflation environment.

We like APA because of its consistent dividend growth over many years in a row. APA has one of the longest consecutive growth streaks on the ASX.

At the time of writing, APA’s shares are changing hands for $11.6 apiece. The Company is offering a stable annual yield of 4.56%. We believe APA’s dividend growth is sustainable in the long term as the business exhibits strong cash conversion and benefits from the March 2021 debt refinancing activities and a positive outlook.


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