Yield hunters are finding richer rewards in shares

With the market’s average dividend yield sitting above 5 per cent, a fresh perspective is required.

Yield hunters find rich rewards

How’s this? Just now if you deposit $1000 with NAB for a year the bank will offer about 2.4 per cent. Alternatively, if you buy $1000 NAB shares, and even if the price of those shares does nothing whatever all year, the dividends payment will work out at 8 per cent. It’s more than twice as good.

In essence, the example above is what the so-called ‘‘hunt for yield’’ is all about. Now as we move into a potentially more up-tempo phase on the sharemarket after a relatively positive results season, investors’ attention will surely swing again towards the income offered by our best stocks — especially when set against the modest returns from property and the exceptionally modest returns from cash.

In the wake of the surprising (and, many might argue, unjustified) swoon the ASX endured in January and February, the average dividend yield on the ASX has jumped to an unprecedented level of more than 5 per cent.

Of course there are always dividend traps, and looking across the market the first thing an investor must be careful about is not to fall for a dividend that has pole-vaulted into the stratosphere for the simple reason the company has been mismanaged to a point the yield reflects a dim view held by investors on the share itself.

A useful guide to this sort of risk is the dividend payout ratio — the amount of profits a company is paying out in dividends.

If the ratio is over 100 per cent, it is usually a warning bell: for example, though the recently listed Genworth Mortgage Insurance group has a dividend yield of almost 12 per cent, the dividend payout ratio of 138 per cent spells trouble — other stocks in the 100 per cent plus category would include troubled financial services group IOOF and struggling bauxite producer Alumina. Also in the category are a range of companies with individual issues such as management ability, structural challenges or regulatory risk; examples here would be Ardent Leisure, GUD Holdings, Fairfax media, Tabcorp, NuFarm and Sigma pharmaceuticals.

But if you strip out obvious concerns surrounding the management and financial health of companies, a clearer picture emerges of a dividend-focused sharemarket where many of the top dividend payers are re-emerging as attractive propositions.

The standout sector has to be the banks, which have in the main offered sound results, announced plans to cap their dividend payout ratios and look a lot better now that is it clear the Turnbull government has no intention of reforming the negative gearing regime, which is a backbone of the residential property market.

It has largely been the strength in banking stocks that pushed the ASX over the key psychological barrier of 5000 points earlier this week.

Commonwealth Bank, the giant of the financial services sector, is now on a dividend yield of 5.6 per cent and a dividend payout ratio of 76 per cent.

However, it’s elsewhere within the big four that value appears to be most obvious: National Australia Bank, a bank, which is now domestically focused once more after the disposal of Clydesdale Bank in Britain, is on a dividend yield of 7.7 per cent, though it also carries a very high dividend payout ratio of 92 per cent. ANZ, a bank currently in transition under new CEO Shayne Elliot, is offering a dividend yield of 7.5 per cent and a dividend payout ratio of 69 per cent. Meanwhile, Westpac, the most conservatively managed of the majors banks, is offering a dividend yield of 6 per cent on a 68 per cent dividend payout ratio.

Also offering strong yields are the property trusts or A-REITs. Typically, the larger traditional property trusts have payout ratios much lower than banks: Cromwell is on a dividend yield of 5.6 per cent and a payout ratio of just 17 per cent, Charter Hall is on a dividend yield of 5.8 and a payout ratio of 38 per cent.

If you are looking for yield first and foremost, then regardless of sector, the top stocks would almost certainly be drawn from stocks which for one reason or another have been sold off in recent times. This list might include Orica, which is exposed to the mining industry; Suncorp, which has an untested new CEO and constant negative surprises in operations; Platinum, which is a value investor in a momentum-driven overseas market; or Woodside, a well-managed company in a stricken oil industry.

In the mid-cap sector high yields are also common. One of the fattest yields in this category is G8 Education, an A-REIT which specialises in the facilities that house childcare centres. The group recently offered an impressive set of results but the market is clearly sceptical about both the model and the management here. In fact, the stock regularly appears among the most shorted stocks in the market. G8 has a dividend yield of 6.8 per cent and a payout ratio of 74 per cent.

For sustainably strong dividend yields, look for companies that have a long track record of delivering solid and dependable results: they will almost certainly attract new funds from investors in the months ahead.

What’s more, added to virtually every one of these stocks is the added benefits of franking which for many people would bring the effective yield on many of these stocks up by at least 1 per cent or more.

At NAB that means the yield is closer 9 per cent; for the wider market it means many stocks are offering yields of 6 per cent.

If nothing else, it has to be said it is a unique moment for yield investors.

The Australian