|Summary: The big banks remain high yielders, but they certainly don’t top the list among the blue-chip companies delivering the best income returns. The highest yields overall were in the small caps sector, but you need to do your homework before leaping in – especially into stocks where future earnings may not be able to sustain their dividends.|
|Key take-out: Companies which have provided a dividend yield of greater than 5% consistently over the past three years have made a median return of 69.4% before franking, compared to the All Ordinaries’ median return of 50.5%.|
|Key beneficiaries: General investors. Category: Shares.|
The latest reporting season hasn’t dampened investors’ spirits as they search for yield amid historically low interest rates, with companies proving happy to deliver more cash to shareholders.
While a number of companies are still to release their results, the dividends per share posted so far by Australia’s largest 200 companies are already 5% higher than in 2012-13, according to Bloomberg figures.
Such persistent demand has lifted share prices and compressed yields across the market. As the All Ordinaries and the S&P/ASX 200 index scale fresh multi-year highs every other day, the 12-month trailing yield from the All Ordinaries has shrunk to 4.1% this month (see the graph below).
Barring a correction, this trend looks set to continue. Earlier in the month, when reporting season was one-third of the way through, Eureka Report’s Adam Carr boldly claimed that earnings should at least meet the consensus forecasts for 7-9% growth. With results wrapping up this week, companies for the most part have continued to post strong results and his outlook holds true.
Nevertheless, a number of companies still provide attractive dividend yields to their shareholders – both in the blue-chip space and among small cap stocks.
The highest yielding stocks at the moment are divided into the two tables below. Companies worth more than $5 billion are labelled as blue-chips, and those worth less than that amount are called small caps.
Unsurprisingly the ‘big four’ banks remain near the top of the list despite their steep capital gains over the past few years. Eureka Report’s investing partner, StocksInValue, has a mixed outlook on the banks, believing Commonwealth Bank’s valuation has stretched too far but that ANZ’s future earnings growth is compelling.
Telstra ranks highly with its 7.4% grossed-up yield, though its share price has jumped over 5% this month to Tuesday’s close of $5.74 after its full-year results. On top of increasing its final dividend to 15 cents per share, the telco announced a $1 billion share buyback.
Energy giant Woodside Petroleum and diversified chemicals company Orica are relative newcomers to the dividend dazzlers list. Woodside sparked controversy by choosing to pay out its shareholders at a higher rate after shelving its project at the Browse Basin rather than reinvesting in other projects, while Orica has endured a hard year amid slowing mining activity, with its share price falling 12.7% to $20.86.
BHP and Rio Tinto have also clambered up the rankings. Management from the two mining giants have focused on cutting costs and increasing production amid falling commodity prices – helping to boost the bottom line and therefore returns to shareholders.
With BHP stripping off its more volatile operations through its spin-off, NewCo, it should be able to provide stronger and more consistent dividends in the future. Analysts on average estimate its fully-franked yield to increase from 4.8% to 5.6% by 2015-16.
Insurance Australia Group (IAG) takes the mantle with an 8.6% grossed-up yield, however analysts are concerned about whether the company’s favourable environment is likely to last.
Separately, struggling company Coca-Cola Amatil fell 4.2% last week after warning that profits in 2014 would be well below the previous year. Its soft drinks sales have fallen in the face of the supermarkets competing through lower margins as well as subdued consumer demand.
In the small cap space, Simon Dumaresq’s key pick in the IT sector, ICT consultancy company UXC, makes the list with a 7.9% grossed-up yield. Simon has recently updated his outlook for the company in IT sector: Time to reboot.
Vita Group, a high-yielding small cap that reported stellar full-year results last week and which Eureka Report recommends investors buy, doesn’t register on the list. However, it offered a grossed-up yield of 6.1% in 2013-14 and is forecast to yield 10% in 2014-15.
Numerous studies show companies which pay out a high proportion of dividends relative to their share price perform better than the broader market, particularly over longer time periods.
In fact, companies which have provided a dividend yield of greater than 5% consistently over the past three years have made a median return of 69.4% before franking, compared to the All Ordinaries’ median return of 50.5%, according to Bloomberg.
But beware: stocks with high yields can also be companies in distress, so further research is always necessary. The tables have highlighted in red the stocks with low price-earnings multiples – potentially signalling that the market believes future earnings may not be able to sustain dividends.
Indeed, it’s important to remember that the figures in these tables are historical. The yields and earnings are based on old data, and don’t account for future growth.
One way investors can judge the sustainability of yields is to research companies’ track records, such as those that have been able to consistently grow their dividends year-on-year (see my article Australia’s best dividend growers).