Best dividends today are dug up rather than withdrawn from banks

Resources companies are unloading mountains of cash on to investors through high dividends. Can it continue?

In the past few weeks Aussie investors have been showered with billions of dollars of share dividends courtesy of big companies’ big profits.

Welcoming dividends is nothing new – for decades they have been an important feature of an Australian stock market that pays healthy yields twice as high as many countries.

This is why historically retirees and other investors loved the big banks: regular juicy dividends that are perfect for topping up household income or reinvesting to turbocharge long-term wealth.

Banks remain good dividend players, especially when you add the benefits of tax credits from franking at 30c per dividend dollar received. At the moment the Commonwealth Bank’s dividend is yielding 4.5 per cent, Westpac 6.2 per cent, NAB 5.5 per cent and ANZ 6 per cent.

But banks have lost top spot on the dividend tables in the past decade thanks to the rapid rise of payouts from mining and energy companies. And even though the dividends paid by resources stocks have dropped in the past year, they still deliver investors the biggest incomes.

For example, BHP’s final dividend for 2022-23 more than halved to $1.25 per share after commodity price falls, but its current 5.8 per cent yield still ranks it near the banks.

Other big resources stocks still pay strong dividend yields, including Fortescue Metals Group (8.2 per cent), Woodside Energy (9.5 per cent) and New Hope Corporation (8.1 per cent).

Aussie miners dominate the dividend landscape for investors today. Picture: iStock

A recent article by Forbes.com examined the 10 best dividend payers on the ASX, and all but two were related to resources.

There are two big factors that have fuelled the rise of Aussie resources stocks to the top of the dividend tree.

Firstly, the assets of our biggest players have matured into profitmaking machines. We have three of the world’s biggest iron ore producers listed on the ASX – BHP, Rio and Fortescue – and analysts say they can make money when the iron ore price is between US$30 and US$40 a tonne.

The current price of iron ore, Australia’s biggest export, is around $US120, and even when it dropped below $US100 a couple of times in the past two years those mines remained wildly profitable.

During Covid, government stimulus packages sent iron ore prices in 2021 surging above $US200 a tonne, producing massive profits for our big miners but then a bit of a comedown in the past year as earnings and dividends dropped back to more realistic levels.

Another big factor driving resources company dividends is that the world wants our stuff. Not just iron ore, but oil and gas, coal and copper, and more exotic metals such as lithium and rare earths that are increasingly required for the global transition to renewable energy, electric cars and other electronics.

We also have a developing green hyrodgen industry that could become a game-changer, so the long-term outlook for the resources sector and its dividends remains positive.

However, there are some potential dividend traps that investors should understand.

First, don’t buy a stock just for a high dividend yield, because yields are often based on past payments, and some stocks’ yields are high because they’re in trouble and their share price has plunged.

Second, don’t expect big dividends to flow from resources companies ramping up relatively new projects. It could take years of development before they generate the spare cash of a BHP or Fortescue.

Third, always remember that anything can happen. Wars, oil shocks, megatrends and economic downturns will shape profits and dividends in the years ahead, so it’s wise to diversify.

Originally published as Best dividends today are dug up rather than withdrawn from banks