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Dividend recovery poised for further upside

Lex Hall  |  16 Jun 2021Text size  Decrease  Increase  |  
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A selection of companies in the Basic Materials and Resources sectors offer a dividend yield of more than 4.5 per cent, a trend which is tipped to increase.

Share dividends are recovering strongly from pandemic lows, with the potential for further “upside surprise” in certain sectors and stocks, according to Ausbil Investment Management.

Michael Price, portfolio manager for the Ausbil Active Dividend Income Fund, says dividend are poised to regain pre-covid levels.

“The outlook for dividends is now showing a rebound towards previous levels, which we know will be welcome news to investors in a low-income environment,” Price said this week.

“Looking forward, we expect equities to deliver attractive dividends, with yields outstripping those from alternative income sources.”

All four major banks, which are among the most sought-after stocks for dividend investors, were forced to cut or suspend dividends in 2020.

But Price sees this reversing over the coming months.

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“With growth in deposits, a buoyant mortgage lending market and strong balance sheets, we see further recovery in bank dividends occurring over the coming year, albeit with lower payout ratios than before the pandemic,” Price said.

Since April 2020, iron ore companies such as BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) overtook the banks to become the leading dividend payers in Australia, according to Ausbil data.

Dividend income attractive in a low return world

a chart showing the evolution of dividend yields vs bond yields

Source: Company data, Factset, Refinitiv, MST Marquee

In 2020, iron ore brought in record annual export revenue of $116 billion, up 20.8 per cent on the $96 billion earned in 2019, in a boom year for the resources sector, according to ABS data.

“Looking forward, we believe there is potential for upside surprise from both the banking and resources sectors, with plenty of valuable franking credits to be had for investors.”


A chart showing that iron ore companies became top dividend payers

Source: Ausbil Investment Management

According to data compiled by Morningstar, 13 companies in the Basic Materials and Financial Services sectors offer dividend yields of more than 4.5 per cent. Most of the 13 names offer fully franked dividends.

The top five dividend payers come from the Basic Materials sector, offering yields of between 6.5 and 15.7 per cent. The top payer is iron ore pure-play Fortescue, which offers 15.7 per cent; followed by Rio Tinto, which offers 11.82 per cent.

Among Financial Services, no moat-rated money manager Platinum Asset Management offers 5.45 per cent, followed by ANZ (ASX: ANZ), which offers 4.96 per cent. ANZ and fellow big four bank NAB (ASX: NAB) are the only wide moat names on the list.

Basic Materials and Financial Services stocks with a dividend yield of 4.5 per cent or more

A table showing Basic Materials and Financial Services paying a dividend yield of above 4.5 per cent

Source: Morningstar Direct; data as of 15 June 2021

Big four banks – forward dividend yield

A forward dividend yield is the percentage of a company's current stock price that it expects to pay out as dividends over a certain time period, generally 12 months. Australia’s big four banks carry the following forward dividend yield, according to Morningstar.

Commonwealth Bank (ASX: CBA): 2.40 per cent (2 stars or trading at a 34 premium to Morningstar’s fair value estimate of $77)

Westpac (ASX: WBC): 3.35 per cent; 3 stars or fairly valued

ANZ: 4.88 per cent; 3 stars or fairly valued

NAB: 4.50 per cent; 3 stars or fairly valued

is senior editor for Morningstar Australia

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