Analysts' IntelligenceMacro TrendsSMSF Strategies
High income share plays
2 Dec 2021
1 month(s) ago
The ASX is really an income focused market, which, given the low interest rate environment, makes it attractive.
Picking high income stocks can be considered one way to manage risk. It is actually one reason why the ASX seems to be a safer market than the US market, because the bigger companies have high dividend payout ratios, which are mostly tax enhanced (dividend imputation, whereby if company tax has been paid, then it is tax free to investors).
Indeed it could be argued that the ASX is an income focused stock market and not a capital gain focused stock market.
Investors looking for capital gains have to rely on timing, picking the right moment to buy in or sell. Investors looking for dividend income are typically under less pressure. If the share price falls but the dividend remains the same, that means the dividend yield actually rises. In an environment where fixed interest returns are negligible, that is significant.
Morningstar has identified nine companies it believes offers dividends in the 5-6% range:
“A slew of asset managers and Australia’s oldest company are among the nine stocks Morningstar analysts forecast to deliver dividend yields above 5% this financial year.
Fund manager Pendal Group (ASX: PDL) tops the list of income stocks with a 2022 dividend yield of 7.4%. It’s followed closely by fellow active manager Magellan Financial Group (ASX: MFG) at 6.8%, while power generator and retailer AGL Energy (ASX: AGL) is expected to yield 6.1%.”
All three companies boast sound balance sheets, according to Morningstar’s analysts.
“We’ve screened our database for those names our analysts believe will deliver strong dividend yields in the 2022 financial year. More than half of the nine are trading below their Morningstar fair value and are forecast to deliver long-term share price appreciation. Australia’s largest rail freight operator Aurizon Holdings (ASX: AZJ) is expected to hit a 6% dividend yield in 2022 and is trading at a 25% discount to fair value.
“Aurizon has committed to paying out 100% of profits as dividends. Morningstar senior equity analyst Adrian Atkins says this is appropriate given the firm’s reasonable balance sheet and limited need for investment.”
The Morningstar analysis also considers what it calls ‘moat’: companies it believes have 10 to 20 years of competitive advantage. The banks look sound from this perspective:
“The two wide-moat names on the list are big banks Westpac (ASX: WBC) and Australia and New Zealand Bank (ASX: ANZ). They are forecast to have dividend yields of 5.5% and 5.2%, respectively in 2022.”
Morningstar believes that prior to the pandemic the bank paid out too much of its profit and had to raise money in share markets.
“Covid-19 was a good opportunity for the bank to reset shareholder expectations and we trust it won’t revert to its old aggressive payout ratios. Westpac is the cheapest of the big four banks and the only one to trade at a discount to fair value. It closed Friday at $21.08, a 27% discount to the $29 fair value.”
Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.