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Where to find a 6pc yield in a low-rate world

Lex Hall  |  07 Aug 2019Text size  Decrease  Increase  |  
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A yield of 6 per cent or more is considered to be pretty sound, particularly in this climate of ultra-low rates.

In this article, we show you how we used the new Morningstar Premium website to reveal companies that are offering dividend yields of between 6 and 9 per cent.

The new Morningstar Premium website allows you to unearth such companies very easily.

It features several screeners and other tools that allow users to identify stocks according to specific criteria. Using the stock screener tool, for instance, you can quickly compile a list of wide moat stocks – that is, companies that have a sustainable competitive advantage.

Alternatively, you can use the screeners to identify overvalued companies. You can also limit your search to particular sectors if you wish.

For this search, we sought out Australian companies that offer a dividend yield of 6 per cent of more.

Before we list the companies, a word on what we searched for.

  • First, we limited our “Market” to “Australia and New Zealand”.
  • The “Sector” and “Industry” filters we left blank.
  • Under “Market Cap” we ticked “any”.
  • Under “Equity Star Rating”, (whether a stock is under or overvalued) we selected “3 to 5 stars”.
  • Under “Moat Rating”, we selected “Wide/Narrow”.
  • We left blank the “Stewardship Rating” filter (in other words, management’s ability to generate returns).

Drilling down further, we selected:

  • Under “Price/Earnings”, “Return on equity”, and “Debt to equity”, we selected “Any”
  • And finally, under “Dividend Yield”, we selected “6-9”.

Companies offering dividend yield of 6 to 9pc

The results, from highest to lowest, are below, with some Morningstar analyst commentary:

Perpetual (ASX: PPT)

Moat: Narrow | Star rating: 2 stars | Dividend: 7.28pc

Perpetual is primarily an active value funds manager of Australian equities. It also provides financial advice to high-net-worth clients and is the major provider of trustee services to the securitisation market, as well as outsourced responsible entity services to funds. While it benefits from Australia's ageing demographics and the compulsory superannuation contribution levy, its core Australian equity funds are suffering from net outflows, owing to structural issues of industry superfunds managing more Australian equities in-house and investors increasing allocation to cheaper passive investments and global assets. Nevertheless, Morningstar analyst Chanaka Gunasekera says: “its FUM scale continues to provide it with recurring revenue streams, and it should benefit from continued growth in its private and trust segments and rising markets.”

Janus Henderson Group (ASX: JHG)

Moat: Narrow | Star rating: 4 stars | Dividend: 7.10pc

Janus Henderson is a medium-size asset manager with a product portfolio that remains weighted more heavily toward equity assets. It has US$359.8 billion in assets under management at the end of June 2019. More than half of Janus Henderson's mutual funds were in the top two Morningstar quartiles over the past one-, three- and five-year time frames, with 62 per cent of funds holding 4 or 5 stars, at the end of June 2019, according to Morningstar analyst Gregory Warren. It is trading at 14 per cent discount to its fair value estimate of $33. However, Warren expects JHG to suffer market losses, redemptions, and currency losses as the UK works through its separation from the EU.

Pendal (ASX: PDL)

Moat: Narrow | Star rating: 4 stars |Dividend: 7.09pc

Pendal Group is a pure-play active fund manager with a strong investment performance record. It has a breadth of investment opportunities which appeal to a broader set of investors, thereby providing a differentiating edge over its peers, says Gunasekera. “Geographic diversification increased significantly following the acquisition of JO Hambro Capital Management in the UK, providing significantly larger growth opportunities from offshore markets. Meaningful operating leverage will see operating margins strengthen as additional fee income flows through to the bottom line. Stock market performance influences net flows and funds under management, directly affecting revenue and the share price.” It trades at a 14 per cent discount to Gunasekera’s fair value estimate.

Westpac (ASX: WBC)

Moat: Wide | Star rating: 3 stars |Dividend: 6.78pc

Westpac is still trading at a 10 per cent to the $31 fair value estimate set by Morningstar analyst David Ellis. This is despite the big four bank – and Australia’s oldest bank – being removed from Morningstar’s best ideas list last month. However this removal was largely on the back of the bank’s own success. The share price has risen 20 per cent from lows in December last year. Ellis rejects critics who see Westpac's successful home-loan growth strategy as a key weakness. He says it is in fact a core strength. “Investor concerns, centred on the large exposure to residential mortgages, are overdone. The high-profile multibrand franchise in Australia and New Zealand is slanted towards retail banking, but retains meaningful exposure to the wealth, corporate, and institutional sectors. We see solid earnings upside potential, with international investors continuing to focus too much attention on negative short-term issues. A strong balance sheet, peer-leading loan quality, and impressive returns on equity underpin a solid earnings outlook.”

Platinum Asset Management (ASX: PTM)

Moat: Narrow | Star rating: 3 stars |Dividend: 6.64pc

Platinum is a pure active global equity portfolio manager that employs a contrarian investment style that seeks out unloved companies that it estimates using quantitative and qualitative research are trading below intrinsic value. “It is not focused on asset allocation and portfolios are not influenced by what stocks make up their benchmark index or their weighting in that index,” says Gunasekera. “This methodology has led to significantly higher exposure to developing markets like China and India and less exposure the US than the MSCI World Index. Over the longer-term this strategy has served it well, with its core funds outperforming their benchmarks since their inception. However, over the last five years core funds have generally disappointed.”

National Australia Bank (ASX: NAB)

Moat: Wide | Star rating: 3 stars |Dividend: 6.62pc

NAB, the other wide moat name on our list, is still picking the glass from its hair following the royal commission. But there a positive signs, particularly as it has a new chief executive in Phil Chronican. In David Ellis’s view, this is a sound appointment. “Chronican is well suited to confront the challenges, particularly a hostile regulatory environment and the need to rebuild trust and confidence,” Ellis says. “We view the management and board change as a positive and in the best long-term interest of shareholders. The bank has substantial exposure to the business sector, with 45 per cent of earnings from business banking, and is well placed to take advantage of the recovery in demand for business credit.”

Vicinity Centres (ASX: VCX)

Moat: Narrow | Star rating: 3 stars |Dividend: 6.39pc

Vicinity Centres is Australia's second-largest retail REIT, diversified across all retail categories, but the majority of its capital is in larger shopping malls. According to Morningstar analyst Johannes Faul, portfolio performance is expected to broadly track the overall retail sector, reflecting diversification across geographies and category. “Many of the assets in the portfolio have gone through an extended period of underinvestment, some of which are not being considered for redevelopment to a higher and better use, which could include apartments and offices on the site. Vicinity's $15 billion of directly and indirectly owned malls are skewed to larger shopping centres, with a weighting of 67 per cent to major regional malls, 20 per cent in subregional malls, 11 per cent in outlet centres, and 2 per cent in neighbourhood malls.”

Adelaide Brighton (ASX: ABC)

Moat: Narrow | Star rating: 4 stars |Dividend: 6.19pc

Adelaide Brighton makes cement, concrete, lime and aggregates for Australian construction markets, with leading positions in three of Australia's seven regional cement markets, those being: resource rich Western Australia, as well as South Australia and the Northern Territory. It is the second-largest supplier of cement and clinker products in Australia, producing roughly 30 per cent of Australia's cement requirements. It carries a Morningstar medium uncertainty rating, which as Morningstar analyst Grant Slade notes, reflects the group's exposure to the cyclical nature of infrastructure and building construction markets. “The industry's substantial carbon footprint presents further risk to the industry's profitability, Adelaide Brighton included, but we believe these risks are largely manageable.”

Spark New Zealand (ASX: SPK)

Moat: Narrow | Star rating: 3 stars |Dividend: 6.04pc

Up until 2014, Spark was known as Telecom New Zealand. It is a telecommunications company providing fixed-line telephone services, a mobile network, an internet service provider, and a major ICT provider to NZ businesses. According to Morningstar analyst Brian Han, the medium-term outlook is solid. “Mobile market share is increasing and growth in fixed wireless is helping to partly offset the decline in fixed-line broadband share,” Han says. “The regulator's rejection in 2017 of the Sky-Vodafone merger has also, at the very least, substantially delayed the threat of a convergent juggernaut for Spark to grapple with. Coupled with a relatively benign regulatory environment, there is breathing space for Spark to consolidate its market position and canvas opportunities to reignite earnings growth, for instance, in the New Zealand IT services industry. Spark's strong balance sheet also furnishes the group with defensive appeal and dividend security.”

AMP (ASX: AMP)

Moat: Narrow | Star rating: 3 stars |Dividend: 8.07pc

Life insurance giant AMP has the highest dividend at 8.07 per cent. However, we have put it at the bottom of the list as Gunasekera notes the company has forecast no interim dividend. “Despite AMP's strong market positions in a long-term growth industry, large distribution network, offshore growth options, the very damaging royal commission revelations have been an unprecedented disaster. AMP's heritage brand has been trashed, and its long-term strategy is now uncertain. A wide range of remedial actions have been announced and have been or will be implemented as soon as practicable. Execution is always key, and so far we think the jury is out on whether new management can deliver. AMP's asset-management business is expanding across fast-growing Asian markets, and AMP Bank is recording strong earnings growth. However, AMP's competitive advantages of its distributional reach and brand recognition have been materially weakened following the royal commission.”

is content editor for Morningstar Australia

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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