The Australia share market has nearly recovered from the sell off as a result of Covid-19. The recent example of the Victoria lockdown shows outbreaks can still happen, but the market sees the aggregate risk can be managed and looking past the crisis.
We are more cautious about how the Australian economy will perform after the reduction in government stimulus. The current recovery is supported by the rapid fiscal response, which is expected to step down after March 2021. The question is how spending and income will be affected once the stimulus ends after this date.
The major indexes like the ASX 300 have bounced back, but we expect prices to stall until the uncertainty is resolved.
While the rise in share price usually get all of the attention from investors. Dividends make up a large portion of long term returns. In these uncertain times, owning high dividend blue chip stocks would not be a bad way of riding out the uncertainty.
The benefit of owning blue chip dividend stock is that they have an established strong track record of paying dividends overtime. There is always a risk that dividends can be cut due to changes in business conditions, a downturn in operating performance, or a poor balance sheet with too much leveage. These risks are lower for well established companies compared to small caps.
Australia has a very favorable tax treatment of dividends through the dividend imputation system. It ensures that investors ultimately only pays taxes on company profits only once. Mature companies have no excuses for withholding the return of earnings to shareholders, and as a result, most Australian companies have some dividend yield.
We look for in dividend stocks, focusing on the yield and the sustainability of the dividend in the future. It is not if but when the dividends will be cut on a stock with an unsustainable dividend payout policy.
Top Dividend Stocks List
We’ve gone through the major Australian index and pulled out some of the largest and most well known companies. The table shows the stock’s industry sector’s last 12 month return and the historical 12 month dividend yield.
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- Investing is a percentage game, so it is not enough to just own highest paying dividend stocks but look at the dividend to the price.
- The list of dividend stocks has been sorted by the historical dividend yield, which is calculated by dividing the last 12 months of dividends (excluding the special dividends and capital returns) by the current stock price.
- The gross yields are higher than the reported historical dividend yield as it excludes the benefit of the franking credits.
Top 5 High Dividend Stocks
Not all investors will be familiar with some of the companies above, so we have selected the top 5 to give you an idea of what the company does and under what conditions poses a risk to the income yield.
BHP – The world’s largest mining company has benefited from the fall in the Australian dollar. The Chinese economy’s immediate strong recovery and run up in the iron ore prices have helped its outlook.
Telstra – A staple of retail investors due to brand recognition and percieved stability of income cash flow. The risk in the past was the transition of Australia from Telstra’s network to NBN. The recent completion of the NBN network and its transition to pure retailer has reduced some of this risk.
Wesfarmers – We always liked Wesfarmers due to its management track record of delivering long term shareholder value. The Bunnings business is now the jewel in its crown.
Transurban – Owning tool roads with limited competition have always been the greatest attraction of this stock.
Woolworths / Coles – The strong performance of the share price reflects the strength of the consumer staples sector in uncertain economic environments.
Bonus – Coca Cola Amatil – CCL owns the rights to distribute Coca Cola in Australia and New Zealand. The stock price took a hit as a result of Covid as the major growth story was Indonesia. We expect the dividend to be reduced, but the downside risk look to be priced in.
Ideally, the best dividend stocks will grow dividends overtime in line with earnings. The above list of dividend stock was highlighted given their potential to increase the current dividend overtime.
Risks of High Yield Dividend Stocks
This is a list of the highest yielding dividend stocks because the share prices have fallen with the dividend policies yet being adjusted. This list is mostly made up of financial stocks like the big 4 Australian banks.
These shares look cheap at first glance and can look attractive. But the risk is the unsustainability of the passive income as the market possibly expect the dividends to be cut in the future.
The most common mistake investors can make to try to catch a falling knife through buying high dividend stocks. Unfortunately, there is no way around it as it involves judgment and analysis of the company’s financials to come to your own conclusion on the safety of future dividends.
We are cautious about these groups of stocks as the last 12 months of dividends are unlikely to be maintained going forward.
Suncorp / Australia Banks – Before the crisis, Australian banks were some of the highest paying dividend stocks. The fall in the share prices since has increased the yield but the risk of dividend cuts remains as APRA starts to lean on the banks to shore up their capital positions ahead of the inevitable increase in loan losses due to fall in house prices and increase unemployment.
QBE / IAG – The depressed interest environment globally will not help insurance companies as their earnings are driven by a combination of underwriting insurance premiums and investment income from investing the premiums. A prolonged depressed interest environment reduces their future earnings outlook.
Sydney Airport – The cut back on air travel and continuous border shutdowns is not ideal if you own and operate Australia’s largest airport. The recovery in the earnings will be dependent on the gradual reopening of the oversea travelers in Australia and broader vaccine rollout.
Regular Dividend Payments
Our focus is always on the sustainability of dividend yield, but a subset of investors that would like dividends paid on a more regular basis. The most frequent dividend payment time frame is monthly, and there is only a handful of monthly dividend stocks listed on the ASX.
These are debt investment funds that invest in loans or mortgages that received regular interest payments and, therefore, can make regular distributions.