5 ASX dividend stocks to weather what might be coming next

As much as markets have steadied after last week’s volatility, that volatility could still very well be a harbinger of what’s to come.

Wild moves in Japan – i.e. down 12% one day, up 10% the next – are not normal, and the yen carry trade unwind is likely not over yet. US recession risks remain elevated, despite last week’s signal from the market to the Fed that interest rates need to come down.

As for Australia, we’re about to go through a tough earnings season, interest rates could remain higher for longer, and growth is slowing – we’re already in a GDP per capita recession.

So, where might investors find a safe port to bunker down if things get stormy? Well, there are a handful of defensive stocks with strong cashflows and healthy dividends where investors might consider putting money in the case of inclement market weather.

The stocks below all have market caps over $1 billion, with 1 and 2-year forward dividend yields above 5%. They are also all expected to have positive dividend growth over the next two years, based on analyst forecasts.

Please note that the list below is for educational purposes only and is not intended as a recommendation. Always do your own research. Past performance is not a reliable indicator of future return.

APA Group (ASX: APA)

1-year forward yield 7.15%, 2-year forward yield 7.32%

APA is primarily a gas infrastructure company, with 80% of group earnings generated from managing gas pipelines. Power generation from wind farms, solar farms and gas power stations contributes about 10%, with the rest coming from electricity transmission, asset management and investments.

APA’s earnings are quite defensive, owing to high barriers to entry in its industry and the fact that incremental demand growth can be met most cost-effectively by upgrading existing pipelines. Electricity transmission and gas distribution networks are regulated, with returns set by the Australian Energy Regulator.

Whilst APA needs to keep some capital aside for investment in new projects, it typically pays out 60-70% of free cash flow. Macquarie is one of the most bullish brokers on the company, with a $9.40 price target. They recently commented that, despite softer FY25 and FY26 EBITDA outlooks, dividend growth of 1c-2c/share per annum can still be expected over the next two to three years.

Chorus Group (ASX: CNU)

1-year forward yield 5.87%, 2-year forward yield 6.26%

Chorus is the largest telecommunications infrastructure company in New Zealand. It is the owner of most of the telephone poles, wires and physical exchange assets in New Zealand and has been responsible for building the new fibre optic UFB network, the equivalent of the Australian National Broadband Network (NBN).

Like Telstra here in Australia, CNU holds a dominant, monopoly-like position in New Zealand telecommunications. This is particularly advantageous as the demand for cloud-based services, video streaming, teleworking and 5G networks continues to grow.

Macquarie is one of the most bullish brokers on CNU, with an OUTPERFORM rating but no target price.

Origin Energy (ASX: ORG)

1-year forward yield 5.25%, 2-year forward yield 5.45%

Origin is an energy production and retailing company, focusing on energy sales, power development projects, power generation, gas exploration and production, and hydrogen development. Like the other two names on this list, ORG’s earnings are defensive and regulated.

The broking community is generally bullish on ORG, with 6 BUYS and 1 HOLD and an overall rating of STRONG BUY. UBS is one of the most bullish brokers on the stock, with a $12.10 target price, citing a higher long-term valuation upside. As the value of firm capacity lifts, so too does Origin's upside, notes UBS. Citi is also bullish, with an $11.50 target price.

Bendigo and Adelaide Bank (ASX: BEN)

1-year forward yield 5.2%, 2-year forward yield 5.32%

Say what you will about regional banks, but the BEN share price has been solid over the past 12 months and the underlying business appears to be performing as well. The focus for the bank in coming years is to ramp up business lending, with the goal being growing at or above system growth (industry average) by FY26, and “substantially above system” by FY29.

As is the case with most of the banks, the brokers aren’t overly bullish at the moment, with Morgan Stanley the only one I could find that is OVERWEIGHT, with a target price of $12.10 (the current price is $12). While this is not a great deal of upside on the surface, remember that this thought experiment was about finding stocks that could weather a downturn better than others, and still deliver a decent dividend.

Whilst BEN will be beholden to the cycle just like any other bank, the roll-out of the new mortgage lending platform should improve overall volume growth, whilst also having a very healthy balance sheet. Morgan Stanley believes BEN could consider a share buyback given its healthy level of surplus capital and improved profitability. Equally, it could hold onto that cash to weather any potential downturn.

Transurban (ASX: TCL)

Well, if it isn’t everyone’s favourite defensive income stock – TCL. This one is super defensive given the inflation-linked, government-endorsed toll prices that we all have to pay and the fact that, unless there is another pandemic, we all need to drive and use TCL’s roads.

The brokers are neutral to bullish – 3 BUYS, 3 HOLDS – with UBS the most bullish. It has a $14.60 target price after the results released last week, noting that the numbers were in line with forecasts. 

While Q4 traffic numbers missed forecasts, an offset was provided by lower-than-expected operating and corporate costs, and cash finance costs. UBS also noted that management's FY25 guidance of 65cps suggests around 7% underlying free cash flow (FCF) growth.

Citi is also bullish on Citi, with a BUY rating and a $14.30 target price. Citi notes that TCL is expected to pay 95%-105% of free cash flow in dividend payments. 

Over to you

What's your favourite defensive income stock - one that's never let you down?

And perhaps more importantly, have you started buying (or adding to) it recently?