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Finding dividends in a downturn

Lex Hall  |  30 May 2020Text size  Decrease  Increase  |  
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Around this time last year, investors were breathing a collective sigh of relief at news the Coalition’s election win would kill off Labor’s plan to crack down on franking credits.

Twelve months on, however, the coronavirus crisis has hobbled economies and companies and choked off some dividend distributions altogether. Since 2000, the S&P/ASX 200 has on average returned about 7 per cent annually.

But investors now face a dividend void, notes Morningstar’s director of equity research Adam Fleck, with blue chips ditching or deferring their dividends in an effort to prioritise business survival over cash distributions.

However, as Emma Rapaport reports, new Morningstar research this week reveals that not all companies have turned off the dividend tap. In fact, about half of the companies that our analysts cover will grow dividends in fiscal 2021 from depressed levels in fiscal 2020. The median payout will fall from about 70 to 60 per cent but it’s better than nothing.

Where will the dividends come from? A few sectors stand out: namely utilities, industrials and consumer defensive stocks. The Morningstar report is titled Australia's Dividend Visibility Is Clouded, but the Dust Will Settle, and it contains a list of names to investigate. Premium subscribers can access it here. Remember, a Morningstar trial is free.

Also on the dividend front, Morningstar’s Shani Jayamanne this week publishes a Guide to Income Investing in a Downturn, which shows investors how an understanding of a company’s balance sheet can help you create a portfolio with sustainable income. You can read the guide here.

Speaking of income generation, in Firstlinks this week, Graham Hand ponders the recent sale of his family home in Sydney, a house he lived in for more than three decades. Hand admits that while it went for a fair whack that doesn’t necessarily make him a good investor.

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What he does know, however, is that the compounding potential was crucial. Hand examines the wonder of compounding and has some simple tips on how investors can put it to work.

small and big toadstool to illustrate compounding

Elsewhere, we look at what the demise of discount chain Target would mean for Wesfarmers; Glenn Freeman examines how entertainment companies, tech giants and payment platforms are benefiting from the historic shutdown; Larissa Fernand studies gold miners and the factors that tend to play havoc with their stock prices; Nicki Bourlioufas assesses the returns investors have made by participating in covid-19 raisings; and I talk to Morningstar equity analyst Brian Han about working from home and what it means for office landlords.

And finally, Morningstar’s head of equity research Peter Warnes examines the real meaning behind China’s historic move not to set a growth target and warns that punditry based on past cycles is sending the wrong signals to global markets.   

Prem Icon Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

is senior editor for Morningstar Australia

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