Missing dividends start to hurt

Dividend cutbacks at some of the market’s biggest stocks begin to pinch investors big and small.

The dividend wipe-out among many of Australia’s biggest stocks in the depths of the Covid-19 crisis last year will still be hurting many retail investors.

The dividend wipe-out among many of Australia’s biggest stocks in the depths of the Covid-19 crisis last year will still be hurting many retail investors.

The damage inflicted from missing dividends is there for all to see in the latest accounts from the Australian Foundation Investment Company.

As the best known of the ­nation’s listed investment companies, AFIC’s approach to the market is often a mirror to the wider fortunes of active independent investors. The Melbourne-based fund recorded a 42 per cent drop in net profits in the six months to the end of December.

Moreover, the dividend reductions that pulled down profits at the fund ranged well beyond its basket of banking stocks, with AFIC pointedly naming miner BHP among key holdings that were responsible for some of the biggest reductions in income.

But unlike most independent retail investors, AFIC can call on its own internal reserves to maintain income during times of crisis: AFIC paid an unchanged interim dividend of 10c a share, partly funded from reserves. It was the first time the fund had dipped into reserves since the global financial crisis.

The $9bn fund, founded in 1928, now balances growth stocks against income stocks as all investors confront a market where yields have dropped — the wave of dividend cuts last year has pushed the wider ASX dividend yield below 4 per cent.

Overall, AFIC managing ­director Mark Freeman believes that across the market some traditional income stocks will need an extended period to recover, ­citing Sydney Airport as a prime example.

“I think it is going to take a few years for dividends to return to the level we were used to before the crisis,” Freeman says.

However, Freeman says some companies that were “on the front foot” in cutting dividends may ­review their policy in the light of improving markets in recent months. “We’ll be watching the reporting season very closely, particularly key stocks such as the Commonwealth Bank,” Freeman says.

Notably, though AFIC relies on the major banks for dividend income, it remains “underweight” in the banking sector.

“We appreciate the franked dividends from stocks such as the banks but we are also looking for growth — if a quality company can offer growth we will seek it out,” Freeman says.

CSL, the market’s best-known growth stock — where the dividend yield is less than 2 per cent — is ranked as AFIC’s second-biggest holding. As at December 31, the blood products group represented 7.7 per cent of the AFIC share portfolio. CBA was the biggest holding at 8.1 per cent.

The fund, which trades at a premium to net asset value and managed to beat the ASX accumulation index over the reporting period, remains a stronghold of blue chips such as the major banks and larger miners.

Beyond this predictable group of stocks, one of AFIC’s largest holdings is the New Zealand listed logistics company Mainfreight. The Auckland-based company, which competes with Linfox and Toll, is up 50 per cent over the past year.

Known as a conservative fund manager, AFIC has not managed to gain a slice of market darling Afterpay. However, it has moved selectively into technology-­related stocks, with Xero included in its top 20 holdings.

Two significant new stocks on the books that the fund purchased during the term were Fineos (the Irish-based insurance software group) and Sonic Healthcare. AFIC classifies these newer holdings as “nursery stocks”.

“We see these as stocks that are on the pathway to becoming mature quality holdings in the portfolio,” Freeman says.

Originally published as Missing dividends start to hurt