Christine St. Anne: Russell Investments recently made changes to its high dividend ETF. Today, I'm joined by Scott Bennett to talk to us about who are the companies that are giving you, the investors the high dividends. Scott, welcome.
Scott Bennett: Hi Christine.
St. Anne: Scott, besides the major banks, who are the companies in your top 10 holdings?
Bennett: Yeah. We've got a really diverse set of holdings in the top 10 for our high dividend index especially. So when we look through the major holdings, in that we have allocations to things such as telecommunication, obviously through Telstra, which is a very high yielding stock. We also have allocations to areas such as media as well, so Seven West Media is a company that has come up and shown fairly good yield over the past 12 months and we expect that to continue, obviously. Then outside of that we've got exposures in gaming, through companies such as Tatts, and then also more the consumer staples through Wesfarmers and also Woolworths, which have very sustainable - what we think a very sustainable dividend yields. On top of that we also ensure that we do have exposure in the resource sector as well, and that exposure is primarily through BHP, which has a very strong history of paying growing dividend.
St. Anne: Scott, on the point of BHP, a number of investors have been a little bit cranky about the company not giving them the dividends they deserve. So where are they among your top holdings?
Bennett: Yeah. I mean that's quite interesting. I mean BHP generally, the yield on BHP stocks are round about 3% per annum, and that's before including for franking credits. So once you to include franking credits on top of that, you are looking at something around about a 4% yield, which is around about 2% below market, so not the best yielding stock. The reason for that is, I mean, BHP, while it's not necessarily a fantastic growth company, it is very capital intensive in terms of them seeking out acquisitions and the like. But what weï¿½ve seen with BHP, and what might not actually show up on dividend yield. So they have actually been fairly good in terms of managing their capital structure.
Last year, we saw around a significant result of that being, their $2 billion buyback, which many investors were able to participate in and that resulted in substantial amount of yield pickup and income for investors, where that $2 billion effectively treated as a special dividend. BHP, while the yield might not look that attractive in terms of its dividend policy, we think it's been fairly conservative, but definitely progressive in terms of the way it manages dividends over time.
St. Anne: Scott, can you give us a little idea about the processes you have in identifying the sustainable dividends?
Bennett: In terms of the process of using for RDV, what we really want to focus on is not so much what the companies have paid out in the past, but what they are likely to pay out over the next three years. So the reason for that is that dividends, like earnings can be highly sporadic. Those companies are actually likely to pay dividends next year, and for several years after that. So that when we buy a stock, we have a very high likelihood, that it will actually pay dividends over the next three years. So that's where we put the greatest emphasis on the stocks that we are looking at. We obviously do make sure that those companies that we are holding have had a history of paying out a dividend over their history. So we look out over the last five years and look at what their dividend payments have been like over those five years.
The other criteria that we look at, this relates back to the BHP stories, it's really important for investors that their dividends are growing through time. So, if you just save the same amount of dividend each year, over a 10 period, inflation would have eaten away around about a third of the value of that dividend. So you need your dividends to be constantly growing to maintain the purchasing power. So, we explicitly look for dividend growth, and make sure that the companies we are buying have the history of increasing their dividend over time.
Then the final measure we look at is earnings variability. So we want to make sure that the companies that we are investing in are sound, and then they're not highly cyclical.
St. Anne: Investors love the banks when it comes to income stocks. What about the importance of diversification?
Bennett: In the Australian market, we think it's very important to think about diversifying, especially when you are looking at income investing. Because while income investing should be relatively safe way to invest, there are traps obviously associated with very high yield stocks; and while we have confidence in the ability of banks to meet their dividend payments, we think there are lot of a opportunities that investors could forego by just limiting themselves to the banks, and we think there is some very good solid defensive opportunities out there for investors.
ETF include things like SP AusNet, which is an electricity supplier in Victoria. Very stable growing dividend and on a yield of around about 10% fully franked, we think that that offers obviously an attractive opportunity to investors outside of what they might hold within the banks; and we think that level of diversification is important, just so that youï¿½re not overwhelmingly reliant on one source of income.
St. Anne: Scott, banks are also facing a lot of pressures at the moment, so do you think that they are able to sustain the relatively high dividends?
Bennett: Yeah. We think from a capital perspective and from a balance sheet perspective there is not that much pressure to the banks being able to sustain their dividend payouts, and also kind of increase their dividend payouts. What we've seen is the banks have been fairly resilient through time, in terms of supporting their dividend, even though their earnings may have been at risk through some period.
So just as a general policy, the banks don't like to reduce their dividends as a whole. So we think structurally, there isn't really much of a threat to the bank dividend. However, we do kind of realize that from an earnings perspective, the banks can be somewhat at risk. But we think that that risk isn't enough to erode their ability to pay dividends.
St. Anne: Scott, thanks so much for your insights today.
Bennett: Great, thanks Christine.