Where is the best source of secure yield?

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
29 January 2021, 8:30 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

The number of companies able to pay a sustainable dividend was already decaying prior to the onset of the pandemic.

Dividend deferrals and cuts have taken a considerable toll on income investors over the past 9 months, reducing the forecast 12-month forward yield of the ASX200 to 3.4%, below its 10-year average of 4.7%. While we don’t expect yields to return to average over the short term we believe companies will respond as economic risks continue to abate.

Identifying secure yield is critical. Utilities, Telco, Energy and Materials offer the highest projected yields, but we see risks to Energy and Telcos as conditions continue to remain challenging due to pricing and competition we suspect firms may look to preserve capital until conditions improve.

Following APRA’s removal of dividend limits in December we now expect the major banks to be able to sustainably operate with much higher dividend payout ratios in the range of 65-75% over our forecast period.

On our revised dividend forecasts, FY21 dividend yields from highest to lowest are as follows:

  1. Westpac Banking Corp (ASX:WBC): 5.8%
  2. Australia and New Zealand Banking Group (ASX:ANZ): 5.2%
  3. National Australia Bank (ASX:NAB): 4.9%
  4. Commonwealth Bank of Australia (ASX:CBA): 3.6%
  5. Bank of Queensland (ASX:BOQ): 3.5%.

We expect a more challenging dividend environment for the insurers who have been hit by higher COVID-19 provisioning.

We don’t expect QBE Insurance Group (ASX:QBE) or Insurance Australia Group (ASX:IAG) to pay a 1H dividend given payout ratio targets. We think Perpetual Ltd (ASX:PPT) and ASX have the potential to surprise with higher dividends at the half.

The key major Resource companies are already comfortably de-geared such that most of their surplus sale proceeds are likely to make their way back into the hands of shareholders. We expect above average dividends by the major miners.

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Disclaimer: Analyst may own stocks. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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