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7 high quality dividend picks

Nicola Chand  |  08 Jun 2022Text size  Decrease  Increase  |  
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Australia’s largest rail freight operator, a private insurer and three of the four major banks number among the high quality stocks Morningstar analysts forecast to have a dividend yield above 5% next financial year.

Australia and New Zealand Banking Group tops the list with a fiscal 2023 dividend yield of 6.2%. It’s followed closely by competitor Westpac Banking Group at 5.6%, while Australian REIT Dexus (ASX: DXS) is expected to yield 5.5%.

All seven companies in the screen have economics moats, which Morningstar awards to quality companies it believes have ten to twenty years of competitive advantage.

A moat is an indicator of quality and helps investors avoid dividend or value traps. These are cases where companies pay dividends they cannot afford to sustain. In time, profits may fall, dividends get cut and the share price declines.


IRESS is a technology company that provides software to the financial services industry.

Morningstar expects the financial services technology company to grow earnings per share at a double-digit clip over the next decade. A growing wealth management business is more than offsetting its mature financial market segment.

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Morningstar equity analyst Gareth James believes that IRESS will be able to maintain their dominant position as a leader in the financial market software business due to the unique nature of their product as well as costs associated with switching to a different company for IRESS customers.

“We expect the narrow economic moat, underpinned by customer switching costs, to help defend the dominant position in Australian financial market software and enable the Australian wealth management software business to maintain its industry-leading market share,” says James.

IRESS is currently trading at $10.43, a 5.18% discount to the fair value of $11.00.
IRESS paid a dividend of 30 cents per share in March. Morningstar analysts are forecasting a dividend yield of 5.2% in fiscal 2023.

Aurizon Holdings Limited (AZJ)

Aurizon Holdings is Australia’s largest rail freight operator transporting coal, iron ore and agricultural freight.

Aurizon Holdings shares are currently swapping hands at $4.20, a 10.64% discount to Morningstar’s fair value of $4.70.

Morningstar believes high coal prices will encourage more coal mining and lead to Aurizon transporting more volume on its network.

“Current high coal prices suggest the medium-term outlook for haulage volumes and earnings is positive,” says equity analyst Adrian Atkins.

Markets are discounting shares due to Aurizon’s coal exposure, but Atkins believes the risks are overblown and more than priced in.

“Considerable downside is already priced into the shares, which we think will probably prove overdone.”

Aurizon paid a dividend of 10.50 cents per share in March. Morningstar analysts are forecasting a dividend yield of 5.4% in fiscal 2023.

Dexus (DXS)

Dexus is an Australian real estate group that owns, manages, and develops real estate assets and manages real estate funds on behalf of investors.

Morningstar equity analyst Alexander Prineas believes income investors will be rewarded over the long haul as Dexus continues to grow its fund management business and “huge” $18 billon development pipeline.

“We remain confident in our long-term income and distribution assumptions for Dexus, estimating that funds from operations and distributions can grow by more than 40% over the next decade.”

Dexus shares are currently trading at $10.01, a 7.31% discount to the fair value of $10.80.
Morningstar believes Dexus’ plans to acquire Collimate Capital’s real estate and domestic infrastructure equity businesses will diversify Dexus’s offerings.

Dexus paid a dividend of 28 cents per share in February. Morningstar analysts are forecasting a dividend yield of 5.5% in fiscal 2023.

Medibank (MPL)

Analysts at Morningstar believe Australia’s largest private health insurer is well positioned to generate income in the long term thanks to government support for the private health insurance sector.

“Operating in a heavily regulated industry, Australian health insurers typically produce stable and defensive earnings, and, in our option, Medibank is well placed to produce solid long-term earnings growth,” says equity analyst Nathan Zaia.

Medibank shares are currently trading at $3.17, a 3.94% discount to Morningstar’s fair value of $3.30.

The insurer paid investors a dividend of 6.1 cents in March. Morningstar forecasts a dividend yield of 4.6% in fiscal 2023.

Banking majors

High quality income is on offer with three of Australia’s banking majors trading in a fairly valued range or better amid an improving outlook for the financial sector.

NAB (ASX: NAB) is currently fairly valued, while ANZ (ASX: ANZ) and Westpac (ASX: WBC) are trading at 22.94% and 24.21% discounts to fair value, respectively.

Rising interest rates promise to fatten bank margins as a growing economy boosts credit growth. Cost of living pressures have also encouraged Australians to make bigger deposits in their savings accounts which act as cheap funding for banks.

“The banks are in a better position now than when covid struck in our view,” says Morningstar analyst Nathan Zaia.

“Banks benefit from higher rate environments given they pay little to no interest on parts of their customer deposit funding, and they can generate better returns on deposit and equity investments.

Morningstar forecasts a dividend yield between 5% and 6.5% in fiscal 2023.

Correction: an earlier version of this article stated a dividend payment of $6.10 for Medibank. This has now been amended to reflect the correct amount of 6.1 cents.

is a wealth and finance journalist with Morningstar

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