Dividends are back this reporting season – where to find them

It’s been mostly good news when it comes to dividends this reporting season. Here’s where you can find them.

For Australian share investors, this time of the year is a pivotal period. Throughout the month of August, most companies release their results for the prior financial year and announce their final dividend.

Reporting seasons can bring both good and bad news – fortunately, so far this year, we’ve seen more good than bad when it comes to dividends.

So, based on the data and information the Plato Investment Management team has analysed, here are three key observations for those looking to boost their income through investing in Australian shares.

You can bank on the big banks… once again

The big four banks – ANZ, CBA, NAB and Westpac – have long been favourites of Australian dividend investors. But in recent years it hasn’t been smooth sailing. There was a dark cloud over the sector last year as many feared the impact of COVID-19 lockdowns. Bank dividends were slashed and the Australian Prudential Regulation Authority (APRA) put restrictions on the level of dividends banks were allowed to pay out.

But now, those APRA restrictions have been lifted and it’s become apparent that many of the expected dire outcomes of COVID-19 on the banking sector have not eventuated – in fact, the expected avalanche of bad debts, has been more of a trickle.

We think there’s a high probability that dividends across the banking sector will be lifted back to pre-COVID levels in the foreseeable future. If we had to pick a winner, the standout performer based on its recent result is Australia’s biggest bank, the Commonwealth Bank (ASX: CBA).

CBA reported a net profit after tax of $8.65 billion, which was up 20% compared to the previous year and it announced a final dividend of $2, taking the total for the year to $3.50 a share, fully franked.

That final dividend is a significant 104% increase on the final dividend in 2020 and we think CBA will grow its dividends over the coming 12 months, as its Tier 1 capital ratio sits at a healthy 13.1%. But for retirees the icing on the cake from CBA is an off-market buy-back.

Buy-backs to boost retirement income

Many individual investors don’t realise that off-market buy-backs can provide significant additional tax-effective income, particularly for retirees, because they return franking credits to investors.

Franking credits are the most tax-effective form of income for pension phase and tax-exempt investors.

If you consider the aforementioned CBA buy-back, we estimate it will be worth approximately $121.63 per share for tax-exempt investors, including a franking credit component of $29.99. This represents a premium of around 14% to the market price of CBA when the buy-back was announced.

Along with CBA, Woolworths (ASX: WOW) has also announced a major off-market buy-back during this reporting season in which retirees may be able to generate additional returns.

We think there is further scope for other ASX-listed companies to announce off-market buy-backs during the remainder of this year and into the next, because many hold excess cash and franking credits on their balance sheets.

If you’re a retiree, tendering shares into buy-backs may be a good way to generate additional income. Similarly, if you’re invested in a managed product, you should ask your portfolio managers if they tender shares to off-market buy-backs. If not, it’s likely your investment is not being managed to optimise your after-tax returns.

Telstra is on the up

Telstra (ASX: TLS) has historically been another favourite for Australian income investors, but it’s been an underperformer for a number of years now.

However, the telco’s results released earlier this month heralded a turning point for the business.

It reported a net profit after tax of $1.9 billion, which was up 3.4% from last year, but more encouragingly it flagged that it expected profits to increase in the next year, forecasting mid to high single-digit profit growth in 2022. This expectation was based on stronger earnings in the mobile market and costs associated with the NBN tapering off.

The final takeaway

With interest rates at historic lows (and expected to remain there for at least another two years), dividends from Australian shares continue to deliver more income than most other asset classes.

Think about this; in the current environment, you would need around $20 million in term deposits to generate $60,000 annual income! Fortunately, dividend yields are much higher.

But investing in just one or two dividend-paying stocks is a risky proposition. When it comes to dividend investing, the only free lunch is diversification.

As traditional income stocks such as the banks bounce back, the great thing is there’s also a plethora of strong dividend payers across other sectors that can help in generating strong and sustainable income. For example, the retail and mining sectors continue to present compelling investment opportunities for income-seeking investors.

Along with a diversified and actively managed portfolio, retirees who rely on income from their investment to pay the bills, should ensure their share portfolios are managed to take advantage of their unique tax circumstances.

→ Related: How much you would need to invest to earn $10,000 a year in dividends

Cover image source: Sergey Tinyakov/Shutterstock.com

About Dr Don Hamson

Dr Don Hamson is Managing Director of Plato Investment Management, a Sydney-based fund manager specialising in income generation for retirees and other low-tax investors. Dr Hamson has more than 30 years of experience in the finance industry and has a PhD in Finance and a Bachelor of Commerce with First Class Honours from UQ, and a University Medal. Follow Plato Investment Management on Linkedin.

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