MARKETS SPECTATOR: Super yield chasers

Self-funded retirees are the core drivers of Australian share prices, and managers of growth stocks like the miners are waking up to the need to pay substantial dividends.

You would have had to be hiding under a rock if you had not heard about the ‘yield’ trade in global equities, especially in Australia since we are one of the highest dividend paying markets in the world.

With cash rates globally at or nearing record lows, and some likely to go lower, anyone who needs to earn a real yield on their hard earned savings (superannuation in Australia) has had to move from cash and cash products into high yielding stocks.

Div Yield
BHP Billiton Ltd9.313.10
Commonwealth Bank of Australia8.965.17
Westpac Banking Corp7.775.23
Australia & New Zealand Banking Group Lt6.354.97
National Australia Bank Ltd5.775.78
Telstra Corp Ltd4.576.11
Wesfarmers Ltd3.964.06
Woolworths Ltd3.513.68
CSL Ltd2.391.60
Rio Tinto Ltd2.242.57
Westfield Group1.884.38
Woodside Petroleum Ltd1.873.43

As you can see in the above chart, the top 12 stocks by market weight in the S&P/ASX 200 index have an average gross dividend yield of 4.17 per cent before taking into account any franking credits. Most importantly, they make up 58 per cent of the whole market, hence when money is flowing towards these high yielding names the index is moving higher, at a fast clip I might add. This is exactly what we have seen over the last eight months.

Given the current record low in Australian interest rates of 3 per cent, and expectations that its likely to go lower still, the investing community is starting to realise that the marginal 'pricers' of stocks in the Australian stock market are those who live off investment income. In other words, self-funded retirees, to a large extent are driving our market higher.

Corporate management teams across the country are starting to realise that if they want their stock price re-rated higher, they need to start rewarding investors through a sustainable, high dividend stream.

So, while high yielding stocks have outperformed strongly, the same can’t be said for growth stocks, which generally have lower dividends. In particular, I’m talking about the other big sector in Australia, the resources industry.

Obviously, apart from the lack of high sustainable dividends, there are other concerns weighing over the mining sector. These include an increasingly negative view of China’s demand for commodities given the recent attempts to cool the housing market. However, from what I’m hearing from people on the ground in China, is that demand for commodities is the last thing we need to worry about.

Also weighing on sentiment is the recent rebound in the US dollar, which pressures US-dollar-denominated commodity prices, and the murmurings that Ben Bernanke is going to turn off the printing presses sometime soon. Again, if you listen to what the Fed says, especially the voting members, there is little chance this is going to happen anytime soon. Hence, I think there is only so far the US dollar can rally before the buying will dry up.

So, in short, there are plenty of clouds hanging over the big miners for now.

However, I think there are early signs of change at the big end of the mining sector. We’ve recently seen a management ‘changing of the guard’ at the likes of Rio Tinto, BHP and Anglo American. The new kids on the block are known to be much more stringent on costs, which bodes very well given they are inheriting mining giants entering a very different phase of their lifecycle.

Following the recent reporting season, poor cost results from the big miners are typical of a sector that has had a multi-year tailwind. This is in direct contrast to industrial cyclicals that have been facing a stiff headwind for the best part of five years, and have slashed costs considerably.

So while the industrial sector showed upside dividend surprises the mining sector disappointed with negative dividend growth.

From the little we have heard so far, it appears the new management teams understand this and are about to embark on the same journey industrials did a few years ago.

Costs are going to be reined in and there’s likely to be a partial reallocation of capital away from growth projects and towards shareholders through higher dividend payout ratios, which should attract a stock price re-rating.

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