Marcus Padley’s Opinion
As the central banks treat the global economy like a kindergarten, market interest rates are plummeting, taking the Australian 10-year bond yield – an interest rate that underpins the Australian risk-free return – from 1.435% two months ago to a record low of 0.672% at the time of writing. Term deposit rates are heading under 1% and with inflation at 1.8%, term deposits are now offering a negative real return.
With term deposits and government bonds paying such low rates equities could be a reliable income source for investors but to do that safely you need to be able to identify companies with sustainable dividends in the medium term.
To help you with that process we have done a quantitative filter of the All Ordinaries (500 stocks) and looked at companies we think offer “sustainable” dividends. This involves identifying companies that for the past three years and the next three years we expect will see dividend growth without a hiccup. We have excluded any company that has had even one negative dividend growth year over these six years.
It has been an interesting process. Thanks to the current bank sector hiccups none of the major banks made it through the filter nor have the high-yielding resources stocks that have become income stocks during the current iron ore price boom.
Instead two major sectors shine through – REITs and infrastructure. REITs and infrastructure should also do well when interest rates fall because of their traditionally large debt burdens. For them, an interest rate cut is as good as a profit upgrade. In which case the total return should/could be higher than the yield.
Here is a list of big stocks, including REITs and infrastructure stocks, that yield over 4% with faultless dividend growth over the past three years and forecast for the next three years. These are listed in market cap order with the biggest at the top. Although 4%-6% yields may not appear to be sexy, especially when they are not franked, in a zero interest rate world 5%, if it’s reliable, is the new sexy.
|Code||Name||Sector||Yield this year||Franking||Gross yield|
|MQG.AX||Macquarie Group||Diversified capital markets||4.41%||40%||5.17%|
|TCL.AX||Transurban Group||Highways & Railtracks||4.14%||6%||4.26%|
|AMC.AX||Amcor PLC||Paper packaging||4.96%||0||4.96%|
|COL.AX||Coles Group||Hypermarkets & Super Centers||3.88%||100%||5.55%|
|SCG.AX||Scentreed Stapled||Retail REITs||6.83%||0||6.83%|
|SYD.AX||Sydney Airport||Airport services||5.16%||0||5.16%|
|ASX.AX||ASX||Financial exchanges & data||3.13%||100%||4.48%|
|APA.AX||APA Group||Gas utilities||4.63%||37%||5.36%|
|MGR.AX||Mirvac Grp Stapled||Diversified REITs||4.02%||0||4.02%|
|GPT.AX||GPT Group||Diversified REITs||4.79%||0||4.79%|
|CCL.AX||Coca-Cola Amatil||Soft drinks||4.29%||0||4.29%|
|TWE.AX||Treasury Wine Est||Distillers & Vintners||3.47%||100%||4.96%|
|ALX.AX||ATLSRTERIA FPOSF||Highways & Railtracks||4.56%||0||4.56%|
|WOR.AX||Worley FPO||Oil & gas equipment services||4.28%||0||4.28%|
|CGF.AX||Challenger||Other diversified financial services||3.88%||100%||5.69%|
|SOL.AX||Soul W.H FPO||Coal & consumable fuels||3.03%||100%||4.33%|
|JBH.AX||JB Hi-Fi||Computer & electronics retail||4.32%||100%||6.18%|
|CAR.AX||Carsales.com||Interactive media & services||2.96%||100%||4.23%|
|GOZ.AX||Growthpoint Prop||Diversified REITs||5.68%||8%||5.89%|
|GNE.AX||Genesis Energy||Electric utilities||5.86%||0||5.86%|
|SCP.AX||Shopping Centres||Retail REITs||5.07%||0||5.07%|
|CLW.AX||Charter Hall Sta||Diversified REITs||5.22%||0||5.22%|
|PMV.AX||Prem Inv. FPO||Apparel retail||4.48%||100%||6.40%|
|ABP.AX||Abacus Property||Diversified REITs||5.25%||0||5.25%|
|CQR.AX||Charter Hall Retail||Retail REITs||6.16%||0||6.16%|
|VVR.AX||Viva Energy Stapl||Retail REITs||5.61%||0||5.61%|
|Source: Marcus Today. 3 March, 2020. These are listed in market cap order with the biggest at the top.|
My final thoughts
- Retailers such as Coles and JB Hi-Fi appear to offer reliable yields, and are held in many income funds but are unreliable cyclical sectors for income. Coles is in a lot of income funds. Food retailing is less cyclical.
- If you want reliable income from equities then REITs and infrastructure are the go-to sectors but there is little, if any, franking. Of course these like all investments are not risk-free.
- Big banks are no longer reliable income stocks.
- Big resources are currently high-yielding stocks but the dividends will come and go with the commodity price cycle.
About Marcus Padley
Marcus Padley is the author of the daily stock market newsletter Marcus Today. AFSL Licence holder: MTIS Private Wealth Pty Ltd, AFSL 473383.
Main image source: 1599686sv (Shutterstock)