20 Aussie dividend ideas


Lex Hall  |   24th May 2021  |   5 min read

APA Group, Platinum Asset Management, and Pendal Group top a list of 22 stocks under Morningstar coverage that provide a forward dividend yield of more than 5 per cent.

APA Group (ASX: APA), Australia’s largest gas infrastructure company, delivers a forward dividend yield of 5.43 per cent; financial services companies Platinum Asset Management (ASX: PTM) and Pendal Group (ASX: PDL) deliver 5.12 per cent and 5.07 per cent, respectively.

A forward dividend yield is the percentage of a company’s current stock price that it expects to pay out as dividends over a certain time period, generally 12 months.

The most dominant sector for high yields is Financial Services: nine stocks on the list of 20 come from this sector. The next most prominent sector is Consumer Cyclicals, which features four names.

The Industrials sector accounts for three names; Communication Services and Technology both account for two names. The list is rounded out by Consumer Defensive.

All names are included in the Morningstar Australian Dividend Yield Focus Index. The index tracks the performance of a portfolio of high-quality, dividend-paying securities. The constituents of the index are a subset of the Morningstar Australia Index, a broad market index representing 97 per cent of Australian equity market capitalisation.

This Index does not incorporate Environmental, Social, or Governance (ESG) criteria.

The list also features several names that are significantly undervalued according to Morningstar fair value estimates. This group is led by five-star funeral home operator InvoCare (ASX: IVC), followed by money managers Magellan Financial Group (ASX: MFG) and the aforementioned Pendal Group.

At the other end of the valuation spectrum, the most overvalued name is Domino’s Pizza (ASX: DMP), followed by Wesfarmers (ASX: WES) and Woolworths (ASX: WOW).

In terms of competitive advantage, the list features four wide moat stocks: InvoCare, stock exchange operator ASX (ASX: ASX), toll road operator Transurban (ASX: TCL), and Australia’s largest conglomerate Wesfarmers, whose retail operations include the Bunnings hardware chain.

In terms of uncertainty, most stocks on the list carry a Medium rating. Only two stocks are rated High uncertainty: GWA Group (ASX: GWA), a leading Australian designer of sanitary-ware and bathroom fittings;  GWA’s risks relate mainly to future housing construction weakness, lower consumer confidence, and an increase in import competition. Perpetual (ASX: PPT), one of Australia’s oldest financial services firms, also carries a High uncertainty rating. Acquisitions are part of Perpetual’s expansion, which while positive can bring risk. It could for instance overpay for acquisitions, not reinstate inflows as planned, overspend, or create cultural instability.

The gross yield on the ASX 200 (including franking) is expected to strike 5 per cent over the coming year, according to Dr Peter Gardner, senior portfolio manager, Plato Investment Management. Active and tax effective portfolio management should be able to deliver significantly more, he adds.

“The outlook for income investors looks remarkably bright, especially when you consider how things were looking just six months ago,” says Dr Gardner.

“We project the ASX 200 is on track to return around 5 per cent gross yield [including franking] in the coming 12 months. While income from cash-backed assets continues to languish, fortunately we are in the midst of a major turning point for dividend income, buoyed by the strong recovery of financials and also the continued strength of our major miners,” he says.

The index in focus

As always, we invite you to click on the links to get a fuller picture of Morningstar analysts’ take on the pros and cons of each.

20 Aussie Dividend Ideas

Source: Morningstar Direct; data as of 18 May 2021

Beware dividend traps

There are higher-yielding stocks on the ASX. However, a high yield is not always a sign of financial health and may signal a so-called dividend trap.

Neil Sutherland, partner at fund manager Dundas Global Investors, says there can be three causes for a dividend trap, where both the dividend goes down and the price goes down over time.

“Each of these less-than-desirable situations are known as dividend traps—an attractive yield that is too good to be true. There are three causes: one, very high pay-out ratios; two, high indebtedness; and three, the difference between profits and cash.

“High pay-out ratios mean companies are not investing sufficiently in their own business to drive real dividend growth. In some businesses there can be a big difference between stated profit and the cash flowing into the business, thus placing the dividend under threat,” says Sutherland.

“In order to determine dividend sustainability, a clear view on whether the dividend is supported by sustainable earnings and free cash cashflow is needed,” he says.

Cross section of sectors

Following is a Morningstar analyst snapshot of the three top names in terms of forward dividend yield.

APA Group

Showing there’s still good opportunities in its core business, APA is embarking on a staged expansion of capacity in its East Coast gas grid to ensure southern states have sufficient supplies despite falling output from local gas fields. The upgrade is de-risked to a large degree by a new gas transport agreement with Origin Energy, which will cover most of the cost of the upgrade. We increase capital expenditure forecasts for the next five years by 15 per cent to $2 billion and lift earnings forecasts. We now forecast EBITDA growth to average 4.2 per cent to fiscal 2025, compared with 3.8 per cent previously. We also modestly increase longer-term capital expenditure and earnings forecasts to factor in further likely upgrades of the East Coast grid. These changes drive a 3 per cent increase in our fair value estimate to $9.80 per security. At current prices, APA is fairly valued. (Adrian Atkins)

Pendal Group

Pendal Group is one of Australia’s largest active fund managers, with AUD 101.7 billion in funds under management. In his first major move as chief executive, Nick Good has pitched narrow-moat Pendal’s first acquisition since JO Hambro in 2011. Pendal will acquire US-based value manager Thompson, Siegel & Walmsley, or TSW, in full for $413 million. This deal increases Pendal’s pro forma FUM as of first-half fiscal 2021 by 30 per cent to $132 billion, exceeding peers Magellan and Perpetual. We raise our fair value estimate to $8.60 per share from $8.20, with the sizable FUM uplift partially offset by dilution from issuing new shares at a discount.

Platinum Asset Management

Platinum Asset Management is an Australian-based niche fund manager with a specialty in international equities founded in 1994. We think it will be tough for Platinum to win share from competition (both active and passive), other than by maintaining outperformance with greater consistency. We highlight that apart from tracking an index, passive investments are today capable of mimicking an active portfolio, or even outperforming a benchmark, by investing based on a set of rules or algorithms—all at a lower cost than traditional active funds. Platinum’s balance sheet is sound, and we believe it is likely to be sustained. In general, asset managers (including Platinum) are relatively capital light and do not require any collateral to guarantee investment returns. We expect the firm to remain debt-free in the absence of a material acquisition, which we think is unlikely. Given minimal capital requirements, we believe it’s appropriate that Platinum pays out most of its profits as dividends. (Shaun Ler).

Australia’s big four banks too rate a mention, especially as they begin to increase or reinstate their dividends. At the time of writing, the wide moat banks carried the following forward dividend yield.

  • Commonwealth Bank (ASX: CBA): 2.54 per cent (2 stars or trading at a 27 premium to Morningstar’s fair value estimate of $95.32)
  • Westpac (ASX: WBC): 3.50 per cent; 3 stars or fairly valued
  • ANZ (ASX: ANZ): 5.05 per cent; 3 stars or fairly valued
  • NAB (ASX: NAB): 4.55 per cent; 3 stars or fairly valued

 

Additional reporting: Nicki Bourlioufas

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