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Dividends are dead, long live dividends
Depending on what you read, you may be mistaken that investing for income in ASX-listed shares is well and truly over. Not so, suggests Scott Kelly, Portfolio Manager of the DNR Capital Australian Equities Income Fund. The Brisbane-based specialist Australian equity manager simply suggests investors need to focus on those with the potential to pay a growing dividend, not just those with a current high yield.
According to Kelly, “The recent reporting season was one of the best we have seen in terms of companies delivering results ahead of analysts’ forecasts, and with operating conditions improving across a number of sectors, boards have started reinstating more generous dividend payout ratios”.
Despite the solid headline, DNR has flagged some concerns around those companies ‘currently paying high dividends’ but which may have flat or even negative earnings growth going forward; those dreaded income traps of years gone by. Solely “pursuing a high-yield strategy, while ignoring other factors, is simplistic and fraught with danger. High yields can indicate companies are facing structural headwinds and dividends might be at risk of being cut,” says Kelly.
Dividend sustainability is a core focus of their income fund, with port and infrastructure owner Qube Holdings considered ‘one of the most visionary and well-managed businesses in the ASX 200’. Commenting on the company which is in the process of selling warehouses and property at its Moorebank asset but retaining the rail terminal, they highlight its relatively low current yield but ‘very strong’ outlook for dividend growth. With a forecast payment of just 6 cents in 2020-21 yielding just 2%, DNR expect double digit growth over the next three to five years along with excess franking credits that may potentially allow a special dividend of up to 15 cents per share.
These unique opportunities tend to come only from fundamental, detailed research rather than looking solely at yields and ratios.
Whilst the financial and banking sector have led the dividend recovery in terms of upgrades in February, DNR ‘remain cautious about the role of bank stocks’ in the fund. Westpac (ASX: WBC) was added but in an underweight position compared to the benchmark on the basis of concerns around long-term headwinds facing the sector, particular from fintech companies. They note short-term operating trends have improved with lower bad debt provisions and stronger than expected net interest margins.
According to Kelly, the fund has now holdings in Commonwealth Bank (ASX: CBA) on ‘valuation grounds’ with the top performing ANZ Bank (ASX: ANZ) and National Australia Bank (ASX:NAB) preferred holdings. Put together, the fund has a prospective dividend yield of 4.5% excluding franking.
