Why one manager is bullish on a dividend boom
Are investors looking at a dividend bonanza in 2021? According to Dr Don Hamson, portfolio manager of the Plato Australian Shares Income strategy, the drought may be coming to an end. According to the one of the leading active income investors in the country, investors in the S&P/ASX 200 index are looking at an improved dividend backdrop post-reporting season. In fact, Plato now forecasts a gross yield of 4.8% for the year ahead, a significant improvement on its expectations at the beginning of February.
Looking back, investors must be somewhat shocked, but also relieved, with dividends set to rebound quickly after the most powerful economic shock in several decades. And according to Hamson, this couldn’t come soon enough. “At every cash rate cut over the past decade, self-funded retirees have been dealt a blow,” he says; and with the cash rate now ultimately locked at 0.1% until 2024, they are once again being forced to seek income elsewhere.
While the backdrop is positive, delivering the forecast yield is not likely to be simple, with the manager warning against adopting a “set-and-forget” approach to dividends. It suggests an additional 2% to 3% in income can be delivered through active management while also keeping an eye on increasing franking credit balances at a number of companies.
So where are the dividends coming from?
According to Plato’s analysis, some 59% of the improvement in the forecast yield is coming from the financial sector. Hamson flags the Commonwealth Bank (ASX:CBA) as a “compelling opportunity for investors today,” after declaring a $1.50 dividend, just 25% lower than in February 2020 but representing a payout ratio of just 67% of earnings. CBA has already indicated that the dividend payout ratio will be closer to 70%–80% in 2021.
Following the theme of a banking recovery, Bendigo and Adelaide (ASX: BEN) was flagged as another contributor, with its earnings almost 30% above expectations, after growing 2% on the prior corresponding period.
But it is in the mining sector where the true standouts lie, a sector where Plato has been, in its own words, “banging the drum.” It highlights that three of the top six dividend payers in Australia today are mining stocks, specifically Fortescue Metals Group (ASX: FMG), Rio Tinto (ASX: RIO) and BHP (ASX: BHP), which, according to CommSec, are yielding 11.7%, 7.6% and 5.5% respectively.
As is typically the case when the iron ore price rallies, investors grow concerned about the sustainability of dividends and recent trends. However, Plato remains confident, highlighting that even with significant falls in the iron ore price, all three companies would remain highly profitable.
Finally, the surprise packet of 2020–2021 and the pandemic in general has been the remarkable resilience of pockets of the retail sector. Consumer discretionary stocks in general have benefited from an e-commerce boom, but particularly those that have benefited from the home renovations or work-from-home trend. JB Hi-Fi (ASX: JBH) is a core holding of the Plato fund, announcing a record $1.80 dividend in February, representing a gross yield of 5.1% . With the dividend supported by an 86% increase in profit, and January 2021 sales still tracking at a growth rate of 17%, this is one stock in which Plato clearly has confidence.