Navigating the ASX dividend landscape in 2026
Dividend yields are well below the 10-year average. Here’s how to navigate lower yields in 2026.
The dividend landscape in Australia has changed. Since mid-2023, fixed income yields have exceeded dividend yields. The current ASX200 dividend yield is 3.3%, a full 100bps below its 10-year average of 4.3%.
Modern Portfolio Theory stipulates that investors should receive higher returns for holding riskier assets such as shares. For equities, this return is split up in two components: capital appreciation and dividend yield. Income investors are primarily focused on the latter. Equities can lose value over time, so income investors expect higher dividend yields comparatively to fixed income assets with lower capital risk.
So why are dividend yields falling below fixed income returns if they are riskier asset classes?
Why do dividend yields continue to fall?
The expectation for further rate cuts in 2025 brought greater inflows into equities. Greater inflows into dividend paying shares puts downward pressure on dividend yields – I explained this concept in this previous article. This flock to equities is often referred to as a ‘risk on’ environment.
This doesn’t mean all dividend paying shares will see a decrease in their yield. The dividend yield can still grow if a company is growing earnings and/or increases their payout ratio (% of earnings paid to shareholders) at a higher rate than the share price increases. This point reaffirms that finding individual companies that can sustain their dividends ‘through the cycle’ is vitally important for an income investor.
The other key component in this equation is inflation. Stickier than expected inflationary pressures have pushed back the timing on rate cuts and raised expectations for rate increases. The RBA’s main monetary lever is adjusting the official cash rate which aims to maintain an acceptable level of inflation.
There is an expectation that inflation will eventually fall to the target band, which will allow for future rate cuts. However, inflation remains the big ‘IT’ factor in the fixed income yield environment.
Finding dividend yield opportunities on the ASX
Morningstar’s latest dividend pick list features 24 ASX shares. The average forecasted yield for the group is 5.7% over the next two years. Almost half of these picks offer yields of 6% or higher or double the 3.3% average on the ASX200. More importantly, these forecasted yields exceed the fixed income yields shown in the graph above.
The key screening metrics used are business quality, valuation, yield and yield durability. I have picked two shares that operate in different industries. Diversifying across industries provides investors efficient diversification, another core pillar of Modern Portfolio Theory. Both shares have compelling arguments as contenders in an Aussie income portfolio. Let’s take a closer look at these two companies.
BHP (ASX:BHP)
- Fair Value Estimate: $44 (10% premium at 19 January)
- Rating: ★★
- Moat: None
For most Australian readers, BHP really needs no formal introduction. The global mining leader has a lengthy track record of delivering strong returns for income investors. BHP’s average dividend yield over the past five years is 6.10%, well above the ASX200 average.
Businesses that sell commodities tend to have greater uncertainty around their distributions. This is due to the volatile nature of commodity prices. BHP has a track record of managing volatile earnings ‘through the cycle’ better than most competitors. This is due to the sheer scale of BHP’s operations.
The addition of BHP into the ASX dividend list cited high quality, low cost assets which enable profitability through the commodity cycle. These flagship assets include the WA iron ore operations and copper mines led by Escondida, the largest copper mine in the world. Iron ore prices remain strong, above USD 100 per metric tonne. Copper prices also remain elevated. These two factors are strong tailwinds for BHP given these are its two largest segments.
Key catalysts for BHP include forecasted increases in iron ore sales volume and commencing potash production in Canada in 2027/28. The biggest risk to income investors is the cyclical nature of commodity prices. This is amplified by waning demand from China – BHP’s largest customer.
In saying this, the strong diversification of BHP’s revenue allows for greater visibility of earnings, which flows through to shareholders in more predictable dividends.
Our analysts forecast BHP’s yield to remain steady at 5% over the next two years. When considering 100% franking, the grossed-up yield is closer to 7.5% over the same period. BHP’s dividend yield is substantially above the average ASX200 yield. Comparatively, it yields higher than majority of fixed income alternatives seen in Figure 2.
APA Group (ASX:APA)
- Fair Value Estimate: $9.30 (6% discount at 19 January)
- Rating: ★★★
- Moat: Narrow
APA Group can be likened to a ‘toll road operator’ for Australia’s energy needs. The company owns over 15,000km of gas pipelines connecting over half of Australia’s gas supply. APA charges gas providers a fee to transport gas through their pipelines to customers across Australia. Gas transmission and distribution is the company’s legacy segment which generates 80% of group earnings. APA is by far the largest gas pipeline firm in Australia and maintains a sizeable competitive advantage.
APA has more recently invested in sustainable energy through wind farms, solar farms and gas power stations which contribute 11% of total earnings. Other segments include electricity transmission, asset management and its investments arm which combined contribute the remaining 9% earnings.
APA’s inclusion in the ASX dividend list comes down to the quality of earnings and its strong distribution record. In fact, APA is one of the few ASX listed companies which has successfully increased its dividend annually for the past 20 years. This includes trying periods such as the GFC and Covid. For income investors, defensive earnings ‘through the cycle’ is a green flag and APA has demonstrated this through their distribution discipline.
Near term catalysts for APA include improved earnings on the back of increasing fees (CPI linked) and cost cutting initiatives such as divestment of non-core assets. Long term, there are concerns surrounding the Wallumbilla gas pipeline which APA will cease operations in 2035. This pipeline represents roughly one third of earnings. Our analyst believes that APA must use the remaining cash flows from Wallumbilla to fund new projects and/or reduce its current leverage.
Our analysts forecast APA’s dividend yield to grow from 6.3% in FY26 to 6.4% in FY27. The grossed-up yield which includes partial franking is 6.9% and 7.3% respectively. This is assuming 23% franking in FY26 and 32% franking in FY27. This forecasted yield is almost double the ASX200 average and exceeds the average fixed income yields we mentioned earlier.
Wrap up
The ASX dividend environment is shifting. With the ASX200 yield substantially below the 10 year average, income investors are challenged to find durable income options. Both BHP and APA are strong examples of dividend opportunities on the ASX for different reasons.
BHP’s ability to manage distributions ‘through the cycle’ is a standout attribute for income investors. APA on the other hand has highly visible, defensive earnings which has allowed them to increase distributions for 20 consecutive years.
