Looking for dividend yielding opportunities?
Dividend payments were relatively solid in the recent earning season but with cash rates rising there are a number of other yield plays investors can adopt.
Mentioned: BetaShares Global Income Leaders ETF (INCM), VanEck Emerging Income Opps Actv ETF (EBND), Bentham Global Income (10751), Magellan Infrastructure (15700), RARE Infrastructure WS Plus Value Hedged (40573), BHP Group Ltd (BHP), Woodside Energy Group Ltd (WDS)
Mining giant BHP Group (ASX:BHP) stunned investors and markets alike when it provided the world’s largest-ever mining dividend.
Indeed, according to an industry report, strong performance from miners helped Australia pay the fourth highest dividends globally in 2021, after the US, UK and Japan.
In fact, other dividend highlights from the earnings season included Woodside’s (ASX:WDS) 270% increase in dividend—in line with Morningstar’s expectations. Morningstar’s dividend forecast for both 2022 and 2023 is equivalent to a yield of in excess of 10% fully franked, making it a very strong dividend paying stock.
However, the outlook for energy and miners is challenged and as noted by Morningstar head of equities Mathew Hodge, its high dividend payments won’t be “hanging around” as the miner focuses on capital expenditure amid falling iron ore prices.
And banks are also well placed to continue to deliver on the divined, front according to Morningstar bank analyst Nathan Zaia. He expects the payout ratio to remain around 60 to 70 per cent but investors should not expect buybacks in the medium term.
Outside equities, there are a number of yield opportunities for investors, according to Morningstar director of manager selection, the incomparable Tim Murphy.
“The hikes in interest rates have seen big change in the markets over the last four months and off the back of that there has been the pickup in bond and cash yields. Investors can now get some of the highest yields from these asset classes seen for many years.” Murphy said.
“Credit is now delivering more meaningful high yield returns compared with what is on offer in equities. We are finding investment now starting with an eight or nine per cent yield in the global high yield sector.”
He highlights the 10-year Australian bond running now at the mid 3.6 per cent while global high yield bonds are at 9%. Investment grade credit is now at 4.65%.
How can investors access these juicy high yield opportunities?
“There's obviously a range of managed funds that invest in global credit, high yield, or emerging markets and increasingly, there's ETFs on the ASX,” Murphy says.
Investors can eye strategies including the Bentham Global Income Fund (CSA0038AU), the Betashares Global Income Leaders ETF (ASX:INCM), and the VanEck Emerging Income Opportunities Active ETF (ASX:EBND).
Outside of fixed income, investors could also look at investing in sectors such as infrastructure.
“Certainly, for investors with a conservative bent and with a focus on income, infrastructure might be an interesting asset to consider.
“Many of the listed infrastructure funds and ETFs that we track have held up quite well and offer reasonable yield prospects.”
Some strategies on offer include the RARE Infrastructure Value Hedged (BTA0543AU) and Magellan Infrastructure Fund (MGE0002AU).
REITs are also another prospect but echoing views from our equity analyst Alex Prineas, Murphy also highlights that the sector confronts challenges around cyclicality and volatility.
A fistful of cash
Cash has been delivering dismal returns over the past years given the ultra-low interest rates but now with rates on the rise, the asset class is poised to deliver for investors.
“With the official cash rates now up to 2.35 per cent, investor can shop around for term deposits that are now offering 3 per cent,” says Murphy.
However, be prepared to look outside the big four when it comes to term deposits given that the majors have not “unsurprisingly” passed on the rate rises to savers, Murphy notes.
In terms of how these strategies work in a portfolio, Murphy echoes the old but trusted role: “Don’t put all your eggs in one basket”.
“When it comes to income investing, historically investors have been putting it all in equities. Introducing some fixed income exposure through government bonds and credit is a good way to diversify your income portfolio.
“Investors must also be mindful of the risks. Some high yield strategies do attract higher risk and it is important investors know the level of risk they can tolerate”.