How To Buy Dividend Stocks in Australia For Passive Income

Students want to know what dividends are, how they work, and how they can invest in dividend shares.


When listed companies profit, they save a particular portion of their earnings for future growth and distribute the rest to shareholders via dividends.


Stocks that pay dividends are often an excellent choice for investors who look for passive income and want to add stability to their investment portfolios. "Dividend Reinvesting" is a strategy that benefits "Compounding", which further helps grow their investment portfolio.


In this blog, you will learn how to buy the best dividend shares paying the highest dividends in Australia to reap their benefits.

If you still need a share trading platform to buy dividend stocks, we recommend the best broker for Australia and worldwide, eToro - You can create an eToro trading account HERE


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1. What Are Dividends?


Dividends are a share of a company's profits or earnings that it returns to its investors. Most companies pay dividends when they have been profitable.


However, some dividend-paying companies might still provide dividends even if they have not been profitable. Many companies also prefer to reinvest their profits in business growth instead of distributing them to their shareholders.


For many investors, dividend payments heavily influence how investors select companies for investment. They help increase shareholders' total returns by providing a regular income stream and stock price appreciation.


Dividends are calculated and paid per share to eligible stockholders monthly, quarterly, or yearly.



2. What Are Dividend Stocks?


Dividend stocks are reputable companies with a strong track record of consistently distributing their earnings "as dividend payments" to their shareholders.


These stocks typically provide stability to an investment portfolio but don't usually outperform high-quality growth stocks.


If you own dividend stocks, you will get a small percentage between 2% to 8% of the stock price.


However, some also pay more than 30% as dividends. The average dividend payout ratio for an ASX 200 company is about 4%.



3. Why Do Companies Pay Dividends?


Companies do not have any obligation to pay dividends.


They distribute a portion of their profits among their investors as it helps them maintain a loyal base of shareholders and bring in new ones. They do it to reward their existing shareholders and allure them to more investment.


Dividends aren't just beneficial for shareholders. They also positively impact companies' balance sheets and help improve their "Return On Equity".



4. How Often Are Dividends Paid?


Many shareholders choose shares based on whether or not a company pays dividends, how often they pay (quarterly, annually, or semi-annually), and what size of dividend it pays.


Most large-cap companies on ASX pay dividends twice a year, about six months apart, as an interim and final dividend. Listed Funds tend to spend every quarter (i.e., once after every three months).


Suppose a company makes a bulk profit in a quarter/year or any particular event. In that case, it can even pay a special dividend to its investors. You can find the history of the company's dividend payments in its announcements on ASX.



5. What Are The Different Types Of Dividends?


You can categorise dividends as fully franked, semi-franked, or unfranked.


Franked dividends imply that the company has paid tax on the profits generated in a year. So stockholders do not need to pay taxes on the same money again. They get a 'franking credit' linked to each dividend that may allow them to lower their tax liability to some extent.


Unfranked dividends imply that the company didn't pay tax on their profits in a year. Thus, its stockholders do not get any franking credits.



6. What Is Dividend Investing?


Dividend investing is a popular investment strategy that investors use to build a passive income and obtain higher portfolio returns.


The technique works on the principle of compound investing, giving you better returns with less money and time.


This strategy is only for some investors as it usually doesn't see capital appreciation. People use it to invest for dividends, not company growth and stock price appreciation.



7. What Are Ways To Invest In Dividend Stocks?


You can invest in dividend stocks in three main ways:


  • Individual Dividend Stocks of Companies: Identify dividend-paying companies with good fundamentals and have a long history of raising payouts annually, such as Walmart.


  • High-Yield Mutual Funds Include Index Funds or Exchange: Traded funds that hold dividend stocks with higher-than-average dividend yields. It can be attractive for those looking for a more diversified approach. For Example., Vanguard High Dividend Yield ETF (VYM) holds consistent dividend payers such as Johnson & Johnson, Home Depot, and JPMorgan Chase.


  • Dividend-Appreciation Funds and ETFs: This approach includes companies with a history of rising dividend payments over time. While they offer lower yields than funds whose main aim is to deliver high payouts, they may give you high earnings growth rates and stock price appreciation over the long term. Dividend growth funds primarily include Walmart, Apple, Microsoft, and Visa companies.



8. Steps To Buy High Dividend Paying Stocks Australia


Creating a portfolio of individual dividend stocks or funds takes time and effort, but it is worthwhile for most investors.


Here is how to invest in dividend stocks for passive income:



Step 1: Sign Up With A Share Trading Platform


The first step is to sign up with a trading platform that lets you invest in dividends stock.


You must compare several factors with various online stock trading platforms to find the most suitable one. Thoroughly assess whether they have an Australian Financial Services Licence, what they charge, how they pay dividends, etc.


If you still need a share trading platform to buy dividend stocks, we recommend the best broker for Australia and worldwide, eToro - You can create an eToro trading account HERE


Buy Australian & international shares with unlimited commission-free trades. (No brokerage)


eToro also offers extensive trading features, social trading tools, and copy trading to imitate the trades of other famous traders, which is perfect for beginners.



Step 2: Have An Investment Plan


Before you start investing in dividend stocks, you should specify dividend investment objectives: 


  • How much to invest in dividend stocks? What dividend stocks or ETFs will you have in your portfolio?

  • Will you reinvest all the dividend income so that your dividend payments compound? Or Will you take out half of the dividend payment and reinvest the other half right away?

  • For how many years will you do dividend reinvesting?



Step 3: Find A Stock of A Company That Pays Dividends


Do your research using historical data to calculate dividend yields, dividend payout ratios, growth, dividend cover ratios, etc., to analyse dividend stocks. 


Study their balance sheet, including cash reserves, debt, and other assets and liabilities, to determine how reliable and profitable a company is. Also, check whether they pay dividends consistently and on time, follow a progressive dividend strategy, and regularly increase their dividend payouts.


Consider the company as well as the industry it operates. Check whether the company's business is at risk from its peers, has weak demand, or is facing some business challenges or disruption.


You can also use a market screener to screen dividend stocks on several financial sites and your online broker's website. Compare companies' dividend yields among their peers to make a buying decision.



Step 4: Decide on Portfolio Diversification


Dividend-paying stocks are perceived to add stability to your portfolio and help reduce losses in adverse market conditions. It would be best to decide what per cent of your portfolio you want to dedicate to such stocks. 


You must consider the nature of dividend stock, such as whether it is risky or safe, and your tax obligations.



Step 5: Understand Dividend Reinvestment Plans


Typically, the company sends dividends directly to the bank account of the stockholders. There is also an option to reinvest the dividend income into the market. It is called Dividend Re-Investment Plan or "DRIP". 


Some Australian brokers offer a feature wherein investors can automatically set up DRIP to reinvest their dividend amount to buy more company shares. Choosing dividend reinvesting gives you the benefits of "compounding" and higher portfolio returns.


You can re-invest dividends with eToro - You can create an eToro trading account HERE.



9. How To Pick The Best Dividend Stocks?


As everyone's investment goals may differ, no stock is ideal for everyone. It would help to consider a few factors before choosing the right dividend stock based on your financial situation and objectives:


  • Dividend yield per share

  • History of dividends

  • Is the company making repeated profits

  • Fundamentals of the stock (cash flows, low debt, profit, and revenue generation). 

  • Sustainability of the dividends in the next five years 

  • Technical analysis (the right price to buy the dividend stock)  


Look for businesses that have the following characteristics:


  • Profitable

  • Low debt-to-equity ratio

  • Consistent and reliable cash flow from a service or product 

  • Have a competitive advantage

  • Have a good track record of paying dividends. 

  • Have historically outperformed the stock market with less volatility

  • They have been increasing their cash flows, ultimately driving dividend growth.



10. Important Terminologies Used In Dividend Investing



  • Dividend Data: Dividend data gives you the details of the recent or all cash dividend payments made by the company: Dividend amount (a percentage of company earnings, Dividend record date, Dividend Ex-date, and dividend payable date. You only need to type the company code on the ASX to view the dividend details.


  • Ex-Dividend Date: The ex-dividend date is when the stock price reduces by an amount equal to the dividend. It is one business day before the record date of the company. If you buy a stock on or after this date, you are not eligible to receive the dividend payment. Only those who buy the stock before this date are entitled to the dividend. 


  • Record Date: As with any stock you buy, it takes two business to arrive in the Demat account and settle. The Record Date is two business days after the ex-dividend date. On this date, a company closes its stock register (usually around 5 p.m.) to finalise registered stockholders eligible for the current dividend.


  • Payment Date: As the name suggests, this is the date a company pays the dividend to its stockholder who had its shares in their Demat account on the record date. It is usually 2 to 3 weeks post Record Date.


  • Dividend Reinvestment Plan: Some stock brokers provide an automated feature that enables users to reinvest the dividend earned to receive new shares in the company. Some brokers even offer incentives such as discounts on the average share price over a period and don't charge any trading or brokerage fees. Investors can buy more shares and earn more dividend payments next time using this passive investing strategy. As their shareholding increases, they get more benefits of "Compounding" from their dividend payments.


  • Cash Dividend Payout Ratio: A cash dividend ratio and the simple payout ratio help investors understand a dividend's sustainability in the company. It is the percentage of operating cash flows of a company minus free cash flow or capital expenses.


  • Dividend Payout Ratio: Dividends are paid based on the company's profit quarterly/semiannually/ annually and its current free cash reserves. The dividend payout ratio gives an idea to investors of how easily the company can afford to pay its dividend. You can calculate the payout ratio when dividing the yearly dividend per share by the earnings per share (EPS).


  • Dividend Yield: The dividend yield is a percentage that helps investors compare returns on investment of different companies. Dividend Yield (in %) = Dividends paid over the last 12 months/ Current stock price.



11. What Is The Dividend Yield?


The dividend yield is a financial ratio showing the percentage of a company's stock price that it pays out yearly dividends. You can calculate it when dividing the annual per-share dividend by the stock price. 


Dividend Yield = Dividends per share/current share price


Generally, as a stock's price rises, its dividend yield reduces. You can use the dividend yield to compare direct peer companies, ETFs, or mutual funds and determine where you would get the most for your money.


The higher dividend yield is beneficial for income investors, but abnormally higher yields can indicate heightened levels of risk.


Based on market conditions, the average dividend yield on dividend-paying companies listed on the S&P 500 index historically fluctuates between 2% and 5%.



12. What Are The Best Dividend Stock Investing Strategies?


Dividend stocks are not just for retirees or risk-averse investors; they are ideal for any portfolio as they help diversify it. 


Investors who are interested in "Dividend Investing" can consider the below aspects to build their portfolio of dividend stocks:



Select The Type Of Dividend Stock


  • Dividend Yield: Buy dividend-paying stocks or funds that offer high dividend yields. Such companies could either be undervalued or face particular business challenges that have reduced the stock price and increased the dividend yield. Sometimes these companies may reduce their dividend yield in the future to address financial problems.


  • Dividend Growth: Alternatively, you can own stocks of companies or funds that have steadily increased their dividends over time. Though they offer lower dividend yields than high-dividend stocks, they have healthy businesses with consistently rising earnings.


  • Dividend-Focused ETFs or Mutual Funds: The option lets investors own diversified portfolios of dividend stocks to generate passive income.


You can reduce the chances of a dividend cut by choosing companies with a sound financial profile, focusing on a growing industry, and consistently raising their dividend payout. 



Set Up Dividend Reinvestment Plan 


After you build your portfolio with the right dividend stocks, the next aspect is to determine how you wish to reinvest your dividends. You can do it manually or set up a dividend reinvesting plan or DRIP.


Many brokers offer dividend reinvestment plans to investors where every dividend received is reinvested into the company at no extra fees/ commission. It is the easiest way to use the power of compounding value and time to build wealth over the long term.


Adding dividend stocks to your portfolio helps lower volatility and amplify your total returns regardless of what dividend strategy you incorporate. It will help to realise your financial goals fast.



13. What Are The Top 25 Dividend Stocks In Australia?


Do you want to earn regular income from your investment? Here are high-dividend stocks that you may consider:


  • Lumen Technologies, Inc. (LUMN)

  • Pioneer Natural Resources Co (PXD)

  • Altria Group Inc (MO)

  • ONEOK Inc (OKE)

  • AT&T Inc (T)

  • Kinder Morgan Inc-DE (KMI)

  • Verizon Communications Inc (VZ)

  • Dow Inc (DOW)

  • VF Corp (VFC)

  • LyondellBasell Industries NV (LYB)

  • Philip Morris International Inc (PM)

  • Walgreens Boots Alliance Inc (WBA)

  • International Paper Co (IP)

  • Prudential Financial Inc (PRU)

  • Viatris Inc (VTRS)

  • Pinnacle West Capital Corp (PNW)

  • Best Buy Co Inc (BBY)

  • Newmont Goldcorp Corp (NEM)

  • Franklin Resources Inc (BEN)

  • Invesco Ltd (IVZ)

  • Seagate Technology PLC (STX)

  • Citigroup Inc (C)

  • Ford Motor Co (F)

  • KeyCorp (KEY)

  • Gilead Sciences Inc (GILD)



14. Top Brokers To Buy Dividend Stocks In Australia


Several top online stock brokers enable you to purchase dividend stocks in Australia.


eToro is one of the leading stock brokers that charge zero brokerage for stock trading. The trading platform is bundled with extensive trading features, social trading tools, and copy trading facility to imitate the trades of other famous traders. You can create an eToro trading account HERE.


(eToro Service ARSN 637 489 466 promoted by eToro AUS Capital Limited ACN 612 791 803 AFSL 491139. Capital at risk. Other fees apply. See PDS and TMD)


Furthermore, the platform also provides fractional share trading and conditional orders to its investors. 


Here is a comparison of popularly used stock brokers in Australia:


Stock Broker Name Price Per Trade Inactivity Fee Markets Served International

eToro (global stocks)


US$10 per month if there’s been no log-in for 12 months

Global shares, US shares, ETFs


IG Share Trading $8 No ASX shares, US shares, UK shares, ETFs, and more Yes
CMC Markets Invest   No
ASX shares, Global shares, mFunds, ETFs

Tiger Brokers $6.49 No ASX shares, Global shares, Options trading, US shares, ETFs Yes
Monex Share Trading


ASX shares, Global shares, US shares, ETFs

Selfwealth (Basic account) $9.50

ASX shares, US shares

Moomoo Share Trading $8.80 No ASX shares, US shares, ETFs Yes
Superhero share trading $5 No ASX shares, US shares, ETFs Yes
Saxo Capital Markets (Classic account) $8 No ASX shares, Global shares, ETFs Yes



15. Frequently Asked Questions (FAQs)



What Are The Best Dividend Stocks In Australia?


Here is the list of the best Australian dividend shares to buy (along with their codes on ASX). 


  • Garage Resources (GRR)

  • GR Engineering Services Ltd. (GNG)

  • Fortescue Metals Group Ltd (FMG)

  • Southern Cross Electrical Engineering Ltd. (SXE) 

  • Magellan Financial Group Ltd (MFG)

  • Lycopodium Ltd (LYL)

  • RIO Tinto Ltd. (RIO)

  • Anglogold Ashanti Ltd (AGG)

  • Macmahon Holdings Ltd (MAH)

  • Gale Pacific Ltd (GAP)

  • Globe International Ltd (GLB)

  • NRW Holdings Ltd (NWH)

  • JB Hi-Fi Ltd (JBH)

  • Woodside Petroleum Ltd (WPL)

  • Regis Resources Ltd (RRL)

  • Smartgroup Corporation Ltd (SIQ)

  • Engenco Ltd (EGN)

  • Elders Ltd (ELD)

  • XRF Scientific Ltd (XRF) Tabcorp Holdings Ltd. (TAH)

  • FSA Group Ltd (FSA)

  • Ambertech Ltd. (AMO)

  • Yancoal Australia Ltd. (YAL)

  • BHP Group Ltd. (BHP)

  • Platinum Asset Management Ltd. (PTM)

  • Medusa Mining Ltd. (MML)

  • Bisalloy Steel Group Ltd. (BIS)

  • Cornado Global Resources Inc (CRN)



What Are The Best Dividend Stocks of All Time?


Dividend aristocrats are companies with a long track record of continuous dividend growth for over 25 consecutive years, even in the past monetary crisis. Around 65 dividend aristocrat companies are listed on the S&P 500 market index as of August 2022. 


Some of these more substantial companies with consistent growth include:


  • McDonald’s

  • Walmart

  • PepsiCo

  • Target

  • International Business Machines

  • Coca-Cola

  • Illinois Tool Works

  • Expeditors International of Washington



Is Investing In Dividend Shares Worthwhile?


Dividends are usually a sign of the financial health of a company. They are an excellent way to supplement your pension with an added passive income. These payments help boost portfolio returns during a share market crash or correction. Investors can use this income either for reinvestment or personal use.


Compared to growth stocks, dividend-paying stocks provide returns to a shareholder even during market volatility, provided that you choose the right stock.


However, your gains from investing in dividend shares depend on your investment approach and temperament. Investing in high-yield and established blue-chip companies with good dividend payouts can stabilize your portfolio under unfavourable market conditions. 


It helps cushion drops in share prices and allows price appreciation with a consistent income stream from dividends.



What Are The Risks of Investing In Dividend shares?



  • Low Growth: As high-yield companies return profits to investors instead of reinvesting them for future growth, they have a low potential for future growth. 


  • Average Returns: Due to low growth, you don’t see much price appreciation in these stocks. That’s why high-yield dividend companies do not outperform the benchmark index.


  • No assurance of dividends: Due to any macroeconomic and company-specific risks, these companies can cut their dividend payouts at any time.


  • Can Be a Dividend Trap: Companies with extraordinarily high yields may not continue having them in the future. Investors, hoping to continue to get dividends, fall into the trap of buying them. 


When the company reduces its yield, investors who have entered the stock with the same objective start to sell, and the selling pressure causes the share price to fall. The trapped investors have to exit the stock with a heavy loss.



What Are Franking Credits?


The Australian Taxation Office (ATO) considers dividend payments as personal income. Due to this, investors need to declare the dividend income they receive in a financial year when filing their yearly tax returns.


Franking credits are an excellent way to reduce tax liability. The Australian government has implemented the franking system to ensure dividend payments are taxed only once a year.


Shareholders receive their dividend payment and an acknowledgement that the company has already paid the tax to the government. This acknowledgement is referred to as a franking credit. Investors with no taxable income can receive these credits through a cash refund.



What Things Do You Need To Pay Attention To When Dividend Investing?


Are you planning to reinvest your dividend money? Here are a few things to watch out for before dividend investing.


1. Taxes: Your dividend income is taxable if you have the shares in a taxable brokerage account. 


2. Dividends can be cut: There is no guarantee for dividends. Companies can reduce dividend payout at any time due to the following reasons: 


  • Economic downturns

  • Negative earnings

  • Company debt or any other financial difficulty

  • Buybacks

  • A shift towards a “growth” strategy


Buying a diversified group of dividend companies via an index fund is a great way to eliminate the risks of choosing the wrong company. 


3. Increasing interest rates: When interest rates rise, investors who have funds and ETFs with high dividend yields may shift to bonds or other assets that cause stock prices to fall.



How Does A Dividend Stock Differ From A Dividend Fund?


A dividend stock is a publicly traded company that makes dividend payments regularly. On the other hand, a dividend-focused mutual fund, or Electronic traded fund (ETF), is a bundle of several dividend-paying stocks.


Dividend ETFs or index funds offer access to an array of dividend stocks in a single investment. This implies that you can own a portfolio of dividend stocks in just a single transaction. The fund pays out dividends regularly, which you can reinvest to amplify your profits.


The advantage of choosing a dividend fund over a dividend stock is that you will spread your risk across various companies. It will help instead of picking only a few individual stocks based on your analysis. Thus, dividend funds give you the benefit of generating passive fund and also helps minimize risks through diversification.


Buying a dividend fund is a good idea for beginner investors looking for a safer approach to make an attractive investment. On the other hand, experienced investors who like researching companies can achieve higher returns by identifying and investing in a few companies they know and understand well.



What Are The Best Long-Term Dividend Stocks In Australia?


Here is a list of Australian blue-chip shares with good dividends and good yield growth prospects:


  • Coronado Global Resources (ASX: CRN)

  • Amcor (ASX: AMC)

  • Deterra Royalties (ASX: DRR)

  • Bank of Queensland (ASX: BOQ)

  • Scentre Group (ASX: SCG)

  • Pepper Money (ASX: PPM)



What Are The Monthly Dividend Stocks on ASX?


Three main businesses give you dividends monthly:


  • G8 Education Ltd (ASX: GEM)

  • Arena REIT No 1 (ASX: ARF)

  • ResMed Inc. (CHESS) (ASX: RMD)



How To Buy Dividend Stocks on Robinhood?


Dividend stocks are an excellent means to earn passive income. Here is a simple guide to buying these stocks on a popular share trading platform – “Robinhood”.


Step 1 - Sign up for a Free Robinhood account


Step 2 - Fund your account.


Step 3 - Search for the dividend stock you want to buy. Robinhood ranks the dividend stocks as per the following criteria:


  • Dividend Yield

  • Market Cap

  • Industry

  • Historical Performance

  • Company Outlook


For example: Click the “Market Cap” column to sort the stocks from highest market capitalization to lowest. Ideally, a company with a higher market cap pays a higher dividend and vice versa.


Below are some of the best dividend stocks you can consider buying on Robinhood: 


AT&T (T): 


  • Telecom Industry

  • 7.20% Dividend Yield

  • $207.64B Market Cap



Coca-Cola (KO): 


  • Food & Drink Industry

  • 3.04% Dividend Yield

  • $239.64B Market Cap



Exxon Mobil (XOM):


  • Energy Industry

  • 5.38% Dividend Yield

  • $273.74B Market Cap



Verizon (VZ):


  • Telecom Industry

  • 4.43% Dividend Yield

  • $236.65B Market Cap



Altria Group (MO):


  • Tobacco Industry

  • 7.18% Dividend Yield

  • $92.68B Market Cap



Iron Mountain:


  • Security and Data Industry

  • 5.73% Dividend Yield

  • $13.41B Market Cap



Step 4 – Once you have decided on the dividend-paying stock, you can buy it just like any other regular stock.


Step 5: Set up Dividend Reinvestment on Robinhood (Optional). After buying a dividend-paying stock, the platform gives the option for dividend reinvestment, wherein cash dividend payments automatically get reinvested into the same stock/ETF. To set up DRIP on Robinhood, click Account -> Settings -> Investing -> click the toggle to On.



What Industries Offer A Higher Dividend To Their Shareholders?


Companies that operate in the following sectors offer higher dividends to their shareholders:


  • Telecom

  • Consumer Staples

  • Utilities

  • Energy (oil and gas)

  • Banks and Financial Institutions

  • Healthcare and Pharmaceuticals



How Are Dividends Taxed?


The dividend stocks tax depends on two factors:


  • Your Tax Bracket: Your dividend income is taxable based on your tax bracket, i.e., at a rate of 0% to 20%. Though most dividends qualify for low tax rates, some stocks pay high dividend yields and come with high tax obligations due to their business structures — for example, Real Estate Investment Trusts, Master Limited Partnerships, etc.


  • How Long Have You Held The Stocks/Funds?: The capital gain tax you are entitled to depends on how long you have held the asset. Those who hold the shares for less than a year have to pay short-term capital gains tax, which is more than those who hold the shares for more than a year (long-term capital gains tax).


  • The Type of Account You Hold Them In: If you hold the dividend-paying stocks or funds in a single or joint account, you will have to pay taxes on the dividends you receive and the realized gains. 


To save yourself from the additional tax burden, you can hold your stocks or funds in a tax-advantaged retirement plan like a traditional or Roth Individual Retirement Account. In this case, you would not have to pay taxes on the realized gains or dividends.



16. Conclusion


Dividends Investing or reinvesting the dividend income can significantly impact your investment portfolio. Dividend stocks are safer investments due to their steady cash flow, significant market share, and brand awareness. However, you should always examine the risk of any investment instrument before buying it.


The best way to incorporate dividend investing as part of your long-term investment plan is by buying a low-cost dividend-yield fund or ETF in a tax-advantaged account. This can help increase your total investment return over time.


If you still need a share trading platform to buy dividend stocks, we recommend the best broker for Australia and worldwide, eToro - You can create an eToro trading account HERE.


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