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5 moat-rated dividend stocks to consider

Glenn Freeman  |  11 Jan 2018Text size  Decrease  Increase  |  
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In the ongoing low interest rate environment, income investors face challenges finding high-quality sources of dividends, but the following list may help.

The following companies, each regarded by Morningstar analysts as holding either a narrow or wide moat of competitive advantage, are tipped to provide solid dividend yields over the next 12 months.

We identified these companies using Morningstar's stock screener, a tool which is available exclusively to subscribers.

Though Morningstar research takes a much longer-term approach, with a 12-month outlook not a comprehensive measure of success, the following list provides a useful starting point for investors to consider.

1. New Zealand telco major 

Spark New Zealand (ASX: SPK), with a market cap of more than $6 billion, is a major player within the aggressive New Zealand telecommunications market.

Generating reliable cash flow and with a strong market share position, Morningstar analyst Brian Han believes the company has the infrastructure to offer a diverse range of products.

"Although competition has been aggressive in the New Zealand telecommunications market, we believe Spark's scale provides a competitive advantage," Han says.

His research suggests it should provide a dividend yield of around 7 per cent over 2018.

2. Big four Aussie bank

Despite Australia's financial sector bracing for a royal commission in 2018, Morningstar's senior banks analyst David Ellis remains confident in Australian banks' fundamentals and competitive advantages.

Wide-moat rated National Australia Bank (ASX: NAB), Australia's largest business bank, is expected to provide a dividend yield of more than 6.5 per cent over 2018, according to Morningstar research.

"The bank's overriding strategic priority is to expand, develop, and leverage its core Australian and New Zealand businesses," Ellis says.

"National Australia Bank is in good financial health, with a strong capital position," he says, and believes the bank's "efficient capital structure and strong balance sheet provide room for comfort".

3. Kiwi utility

Another New Zealand-domiciled business, Meridian Energy (ASX: MEZ) is a vertically integrated renewable electricity generator, which provides one-third of New Zealand's total electricity output.

"We envisage Meridian's growth capital expenditure remaining low, as major expansion is unlikely, given excess industry capacity," says Morningstar senior equity analyst, Adrian Atkins.

"Given the strong balance sheet, with low gearing and escalating free cash flow, the board has lifted its dividend payout to between 75 per cent and 90 per cent--from between 70 per cent and 80 per cent-- as well as paying generous special dividends of around NZD125 million per year," he says. This special dividend complements its existing dividend to shareholders.

4. Listed real estate - retail

Among the listed property space, Vicinity Centres (ASX: VCX) is Australia's second largest real estate investment trust (REIT). Diversified across various retail categories, most of its capital is in larger shopping malls.

Morningstar equity analyst Tony Sherlock anticipates dividend yield of just over 6 per cent for 2018.

Though brick-and-mortar retailers face a challenging environment, Sherlock says Vicinity Centres "will continue to earn income from joint ventures for property management, development, and leasing services. This income is likely to increase modestly going forward."

"The firm has identified $3.7 billion of development opportunities across the portfolio, with Vicinity's share of the end cost approximately 50 per cent," he says, believing a cash yield of around 7 per cent is achievable for most of these opportunities "particularly as many of the legacy assets have undergone a prolonged period of underinvestment".

5. Listed real estate - commercial

Property conglomerate Stockland (ASX:SGP) generates about 75 per cent of operating earnings before interest and tax from its commercial property portfolio (retail, office, and industrial), while residential development and retirement living make up around 20 per cent and 5 per cent, respectively.

Morningstar research indicate a dividend yield of 6 per cent during 2018.

"Stockland appears to be buying new sites in locations that are both popular and affordable, positioning the firm for an annual sales rate over 6,000 lots for the next two years," Sherlock says.

He says Stockland’s strategy to acquire sites adjoining current development "looks a long-term winner as it usually means agreed developer levies for the original site can be replicated for the new site".

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Glenn Freeman is Morningstar's senior editor.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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