Dividend drought: An end in sight?

One sector is about to see a massive drop in payouts but there are a few other stock picks with a brighter dividend outlook.

The dividend drought is set to continue for another while yet, but there are some stock picks out there with brighter payout prospects.

Sharemarkets are on a high but that’s of little comfort to income investors battling through another year of disappointing payouts. And the pain’s not over yet: while stocks push upward, dividends are headed even lower.

This is the last thing income investors need. Dividend growth for the top 200 companies was non-existent in 2024, meaning investors went backwards in real terms. That’s after an even worse 2023 that saw dividends drop 10 per cent.

There’s no relief just yet, with Morningstar now tipping an overall decline of about 5 per cent on dividends for fiscal 2025. Just two months ago the research house was estimating dividends would be flat next year. So what changed?

As is clear from the chart below, there’s one clear culprit: the under-pressure materials sector, which will see a whopping 21 per cent drop in payouts next year, Morningstar estimates.

Growth of total dividends by sector. Source: Morningstar

While this sector accounted for about 30 per cent of overall dividends in the past year, that drops to 25 per cent of overall dividends in 2025. That 5 per cent drop is a big hit to the final tally.

“They’re incredibly cyclical industries and their earnings fluctuate directly with the price of the commodities they sell,” Morningstar market strategist Lochlan Halloway tells The Australian.

“They have no control over (their prices), so they have very little control over what they earn, and therefore very little control over what they pay out. For the most part, their dividend cycle reflects the commodity price,” he says.

Best dividend chances

Anyone hoping the major banks will make up the shortfall will be disappointed. Financials will see dividend growth of just 1 per cent next year, as earnings come under pressure.

Healthcare, industrials and technology are all expected to grow payouts in 2025, but each makes up only a small proportion of the market.

Giving income investors a glimmer of hope, the picture improves in 2026, with overall dividend growth to hit about 4 per cent. All sectors bar energy are expected to lift payouts, Morningstar says. For the miners, the estimate is for a 2 per cent dividend lift in 2026; for financials it’s 7 per cent.

“We think the big winners will be the cyclical sectors – consumer, industrials, and financials – which should benefit from an upturn in economic activity as inflation cools and central banks ease monetary policy,” Halloway says.

Don Hamson of Plato Investment Management, whose strategy includes buying stocks to get dividends before selling and moving on to the next trade, suggests we won’t see any relief from the dividend drought until the economy improves.

“We’d certainly like dividends to increase, but for dividends to increase, earnings need to increase and for that to happen we need to see the economy being stronger, Hamson told The Australian’s Money Puzzle podcast in October.

“Hopefully we will see rates falling fairly soon, and hopefully the economy will start to get back to a normal pace of growth and companies can expand their earnings,” Hamson notes.

But with Donald Trump winning the US election, there are now fears of a fresh round of global inflation if he follows through with his tariff threats. The incoming US president has said he wants to put tariffs of 10 per cent on all goods imported into the US, with tariffs on Chinese goods to be even higher, at 60 per cent.

Banks v gold

Australia’s major banking bosses, including NAB chief executive Andrew Irvine, last week shrugged off suggestions that such moves by Trump would delay the first RBA rate cut, expected in early 2025. But there are concerns, including from banking chiefs, that future rate cuts, into late next year and beyond, may be delayed if Trump goes ahead with his tax and tariff plans.

This could all weigh on earnings of local companies in the year ahead.

As Hamson says, “it’s pretty tough out there”, with banks and commodities all underwhelming on the dividend front.

But gold stocks are a standout, he says.

“Gold prices have held up very well and we saw some very large increases in dividend payments, albeit from low levels, in gold stocks,” Hamson notes.

Along with gold stocks, Hamson likes utilities but says insurers are likely coming to the end of the cycle after a couple of good years of payouts.

Dividend stars

Over at Morningstar, some of the winners Halloway sees as escaping the dividend drought for 2025, include APA Group, Aurizon, Endeavour, Domino’s, and TPG Telecom. The dividend yield is expected to be between 4 and 8 per cent for these names. Just one – Endeavour Group – will be paying out fully franked dividends for investors. The rest will have franking anywhere between 8 and 60 per cent (see the chart below for details).

Dividend yield estimates. Source: Morningstar

Australian investors, and retirees in particular, know all too well the value of franking credits.

Between 2011 and 2022, franking credits added around 2 per cent to annual ASX 200 returns, for 22 per cent of total returns in the period, according to Morningstar.

With the dividend outlook improving after next year, all sectors bar one are expected to deliver higher payouts in 2026. The laggard, as Morningstar sees it, will be the energy sector, which is set to see a 23 per cent drop in dividends. That’s after a 12 per cent fall this year and a further 3 per cent decline tipped for 2025.