New hunting groups for dividend yields

Cochlear, ResMed, CSL and the like have not necessarily done anything wrong, but rising bond yields in combination with a much stronger Australian dollar have proved too much combined pressure for their share prices in recent months. Picture: Jerad Williams

One special mention needs to be made about yield stocks. With rising bond yields one of the consensus forecasts on Wall Street (and beyond) for 2021, your typical bond proxies are facing more resistance than usual, which in many cases has already shown up in weaker prices and noticeable sharemarket underperformance.

Most income-seeking investors would have a long-term horizon and not be too fussed about what happens short term with the share price as long as those dividend payments keep arriving. In most cases there is no change to cash flow projections for REITs and infrastructure companies as a direct result from rising bond yields.

However, those investors focusing on total return including dividends might want to reconsider allocating more exposure towards industrial companies this year. It remains true that headwinds are best tackled with operational growth, and this includes higher bond yields. Industrial companies in general usually have more options to achieve higher growth, assuming they are not solely dependent on borders reopening quickly or struggling with an existential threat from tech-disruption.

Therefore the likes of Aurizon, Super Retail, Pendal, Amcor, Accent Group and Perpetual are likely to outperform your typical bond proxy this year, and potentially by quite a margin. The banks are firmly making their comeback on income-seeking investors’ radar, with analysts busy upgrading their forecasts.

Non-bond proxies offering relatively high dividend yield include Orora, Magellan Financial, Sonic Healthcare, Suncorp, and Iress. Of course, as with REITs that own office towers and shopping malls, investors must remain cognisant that some of the attractive-looking stocks today can easily turn into a value trap in case of adverse outcome. Educated risk assessment remains an investor’s best friend, more so this year, I would argue.

Also global optimism, a lower-risk economic recovery profile and downward pressure on the US dollar have quickly catapulted the Australian dollar to a much higher level against the greenback, and this has created a headwind for foreign earners, of which the local healthcare sector is the prime example. Cochlear, ResMed, CSL and the like have not necessarily done anything wrong, but rising bond yields in combination with a much stronger Australian dollar have proved too much combined pressure for their share prices in recent months.

Within this context, it is worth highlighting Telstra (shares are staging a noteworthy comeback from the sub-$2.80 price reached in October last year). For loyal shareholders, the past five years have been an extremely frustrating experience, probably best illustrated by the fact Telstra shares sprinted to $6.50 in January 2015, and subsequently lost almost half their value over the following 5½ years.

The company is now segregating into separate divisions and looking to sell equity in hard assets including telecom towers and infrastructure, which should prove a straightforward and obvious way to unlock more shareholder value. Selling assets should also guarantee there will be no further cuts to the 16c in annual dividends in the years ahead, which is yet another positive.

I suspect Telstra might well prove one of the surprise outperformers in 2021. Certainly, it can be argued the prospect of asset equity sales has turned the stock into a lower-risk dividend opportunity while many of its peers are facing obvious headwinds.

Rudi Filapek-Vandyck is the editor at sharemarket research service www.fnarena.com