Generally, investors like to position themselves defensively ahead of a slowdown. With inflation high and interest rates rising, sectors less affected include utilities, consumer staples, energy and infrastructure.

As interest rates peak in the next few months – reducing the comparative value of dividend-yielding stocks – it’s important to review which stocks to keep in the portfolio for 2023 and which to trade out.

ASX dividend stocks: What you need to know

When buying shares, investors typically benefit in two ways: from capital gains due to an increase in share price, and from profits paid out in the form of dividends.

Dividend stock investors view a stock’s dividend yield as a 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 paid 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.

Amongst the screening criteria we use are:

Dividend yield
Cashflow
Dividend growth over the last five years
Market price correlation (beta) based on monthly price movements over the past five years
Outlook for the next 12 months based on a slowing economy and interest rates peaking

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 the below ‘top 10’ dividend stocks are not the highest yielding. These are stocks that appear to have a decent chance of continuing to pay out dividends, although there’s no guarantee of future success. Investors can often have higher success with lower-yielding shares of growing businesses rather than get caught in a yield trap.

Avoiding yield traps

A ‘yield trap’ is a stock with a high yield underpinned by poor financials. If a company issues a higher-than-normal dividend or its share price falls quickly, it can appear to be 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.

Often yielding stocks either have low growth potential because management pays out all the profit in dividends, or else they are cyclical stocks such as mining companies that can generate enormous amounts of cash and pay dividends for four years, and then generate almost zero cash on the down cycle.

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.

Diversifying to spread risk

It’s also worth noting that many 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, it’s important to consider the concentration or diversification of a company’s interests and revenue. 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.

Remember, past performance is not an indicator of future returns.

Top 10 ASX dividend stocks to watch

1. Zimplats

Zimplats is a mining company dedicated to the exploration and production of critical minerals in Zimbabwe — with a focus on platinum in the Great Dyke. Shares in the company have risen by 314% over the past five years, and could continue to rise as the critical minerals supply gap widens.

The miner is currently looking to expand into lithium production in the country to capitalise on the growing sector.

As of 17 August 2023, Zimplats has an 11.9% dividend yield.

2. Woodside

Woodside is one of the largest ASX energy businesses, with a focus on hydrocarbon exploration, exploitation and development. The company is heavily investing in new projects, including Mad Dog 2, Scarborough, and Sangomar — though public sentiment concerning new oil and gas exploration may be shifting.

For example, the shock ruling against Santos’ Barossa venture which saw Australia’s regulators toughen up requirements for Indigenous consultation could have implications for Scarborough. And the Victorian Government has just announced it will ban gas connections in all new homes from 2024. Of course, Woodside is now looking for potential projects abroad, including in East Timor.

As of 17 August 2023, Woodside has a 9.8% dividend yield.

3. Whitehaven Coal

Whitehaven Coal operates four coal mines in New South Wales and Queensland and exports coal to countries in Asia. Whitehaven exports both high-value metallurgical coal (for making steel) and lower-value thermal coal for electricity generation.

Over the past year – and possibly into the future – the big story has been thermal coal prices.
There’s been a lot of talk about closing down coal-fired power stations in the west. However, China didn’t get the memo. China added 198 GW of new coal-fired power plants in 2021 with another 260 GW in the pipeline, according to E3G. For comparison, Australia’s total coal-fired power capacity is just 24.7 GW.

As of 17 August 2023, Whitehaven Coal has a 9.6% dividend yield.

4. BHP

BHP is usually the largest company on the ASX 200, accounting for circa 10% of the country’s share market. It’s also the largest miner in the world by most metrics, making it a common dividend choice for Australian investors.

The corporation generates over half of its profits from selling iron ore, predominantly to China, but it also sells copper, nickel, potash, and coal. The company is a global operator with mines across Australia, the United States, Canada, Chile, Peru, Brazil, and Columbia; this variation across jurisdictions and minerals can be compelling for investors who value diversification.

Despite the threat of slowing Chinese economic activity, BHP is actively engaging in asset acquisition, including recently buying up copper junior Oz Minerals. 2022 revenue came in at $65 billion, a 14.4% increase over 2021.

As of 17 August 2023, BHP has an 9.1% dividend yield.

5. GR Engineering Services

GR Engineering is a market leading Australia-based consulting and engineering company, which specialises in providing high quality engineering design and construction services to the mining and mineral processing industries.

The corporation operates in over 20 countries, and given the need to massively increase metals and mineral mining over the next decade to hit global net zero goals, further growth potential could be there. Have commodities have performed relatively well over the past year, giving near-term impetus.

As of 17 August 2023, GR Engineering has an 8.4% dividend yield.

6. Elders

Elders provides agricultural inputs to farms including seeds, fertilisers, chemicals, animal health products and agricultural services, among others.

The war in Ukraine helped push up the prices of corn, wheat and beef for much of 2022, which should long-term help Elders maintain its growth. The company has had a golden run of growth and rising dividend pay-outs and has enjoyed some good news recently.

Despite poor results recently, long-time CEO Mark Allison has agreed to postpone his retirement, and will likely stay until at least June 2025 to collect a significant bonus.

As of 17 August 2023, Elders has a 7.2% dividend yield.

7. Dexus Property Group

Dexus focuses on owning, managing, and developing office, industrial and retail assets. While it has a large portfolio, its most recognised assets are potentially Atlassian Central in Haymarket, and the Rialto Towers in Melbourne — and a logistics facility leased to Australia Post.

Macquarie is bullish on the ASX dividend stock, arguing that shares are currently undervalued and that the yield may also rise soon. The broker expects dividends per share to reach $0.51 in FY23 and $0.52 in FY24, maintaining a yield of over 6% based on the current share price. Macquarie maintains an ‘outperform rating’ and a $9.32 price target compared to the current $7.53.

As of 17 August 2023, Dexus has a 6.9% dividend yield.

8. McMillan Shakespeare Limited

McMillan Shakespeare provides financial services to large organisations (government, private and non-profit) in Australia, New Zealand, and the UK. The financial services include novated leasing (leasing a car through an employer), salary packaging, asset management and disability plan management, among others.

This is a stable industry that is growing slowly in these three countries’ service-based economies.
When heading into economic uncertainty, a company in a stable industry is more likely to be able to maintain dividend payments. Macquarie has an outperform rating and a $20.47 price target on the company’s shares.

As of 17 August 2023, McMillan Shakespeare has a 6.8% dividend yield.

9. Transurban Group

Transurban is a toll road development and holding company. It operates 22 toll roads in Sydney, Melbourne, Brisbane, the Greater Washington area, and Montreal. Toll roads are an extremely boring business that earns very predictable revenues — but millions use City Link in Melbourne, the Cross City Tunnel in Sydney, and AirportlinkM7 in Brisbane.

One thing that stands out about Transurban that it is protected against inflation – and may even benefit from it. As of 31 December 2022, 68% of Transurban’s revenue was indexed with CPI, and 27% escalated automatically at 4.24%.

Transurban benefits because the main drivers of inflation – housing, recreation, food and beverages and household equipment – have no impact on its cost base. Accordingly, Citi analyst believe its shares are ‘providing attractive value’ at current levels, with a buy rating and $16.20 price target.

As of 17 August 2023, Transurban has a 4% dividend yield.

10. Mercury New Zealand

Mercury NZ generates electricity in New Zealand through nine hydro generation stations, five wind plants and five geothermal generation stations. Its dividend is hardly exciting, but the sector means it is relatively reliable.

New Zealand is aiming to reduce reliance on natural gas and coal. The approach New Zealand has taken is with tradable carbon credits, which create a market mechanism aimed at reducing carbon emissions as efficiently as possible.

Over time, the government raises the cost of buying carbon credits, which increases the incentive to reduce emissions. This could phase out coal and natural gas and drive up the price of electricity.

As of 17 August 2023, Mercury New Zealand has a 3.1% dividend yield.

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