Dividends solid as resources stocks dig up more cash for investors

Banks were once the best dividend payers, but not anymore, and experts believe they will continue to remain down the pecking order. Here’s exactly why.

The dividend dominance of Australia’s resources stocks looks likely to continue in 2023-24 after another strong financial year.

While the average dividend yield of ASX-listed companies was about 4.4 per cent in 2022-23, several mining and energy companies delivered double that despite many commodity prices falling. Fourteen of the nation’s 50 largest stocks currently pay more than 6 per cent.

Leading the way are Woodside Energy, Fortescue Metals and BHP, yielding around 9 per cent or more, but the market’s average yield is brought down by companies such as CSL, Woolworths and QBE Insurance paying below 3 per cent.

Analysts say dividend yields overall should stay near their 2022-23 levels, but banks may come under more pressure amid high inflation, interest rates and recession fears.

Australian Shareholders’ Association director Lel Smits said many shareholders were increasing their focus on dividends as living costs climbed and they sought ways to supplement their income.

“Dividend-paying stocks also tend to be more stable than non-dividend-paying stocks as companies that pay dividends are typically well-established and have a history of profitability,” she said. “This can make them less risky investments.”

Moomoo market analyst Jessica Amir said there had been a big shift in recent years around where the largest dividends came from.

“Gone are the days when banks and financials were the biggest dividend payers,” she said.

“That has pivoted to mining and energy companies and they have remained steadfast for some time. And behind them you have got REITs (real estate investment trusts).”

Ms Amir said she did not expect bank payouts return to the “days of old” and she expected resources stocks to remain at the top of the dividend tree.

“If we experience a recession and pullback in property prices, I don’t think financials will be attractive,” she said.

“Investors can get a better return in the resources space, and not just iron ore and copper.”

Green metals such as lithium would benefit from the global push towards zero emissions, Ms Amir said.

She said REITs were generally good payers, but urged investors to focus on industrial property REITs rather than retail property owners such as Stockland and Scentre “which are tied to the consumer”.

The Ausbil Active Dividend Income Fund’s portfolio manager Michael Price said the consensus outlook for dividends from the ASX 200 index for the new financial year was 4.4 per cent – the same as 2022-23.

“Some sectors like software and pharmaceuticals and biotechnology are offering higher dividend growth, but a very low yield,” he said.

“Gold, by contrast, while offering a low yield is also looking at dividend contraction in 2024 based on consensus numbers.”

Mr Price said banks could “surge again”, and investors should remember that many dividends came with attached franking credits that pushed average gross dividend yields to around 6 per cent.

“The current three-year bank term deposit paying monthly is around 4 per cent before tax,” he said.

While most companies pay dividends twice yearly, some investors and funds base their strategy on the timing of these payments by different companies following their reporting dates.

Mr Price said there were dividends payments in almost all months, and a simple buy and hold strategy could not maximise this.

“Through the activity of dividend rotation, which means proactively purchasing into stocks to receive their dividends, an active dividend income strategy can generate dividend income for investors each month,” he said.

“Good dividend payers today may not be the good dividend payers in the future. For example, while banks dominated resources in the payment of dividends in 2019 and 2020, this began to swing in favour of resources in 2021, 2022 and 2023.

Mining stocks are among the best dividend payers on the ASX. Picture: iStock

A high dividend yield is not always good news for investors, because it rises as the share price falls – so a struggling company whose value is sinking like a stone may be a candidate to cut or cancel future dividends.

“Very high-yielding stocks may not be investing in future dividend growth, and so while they pay out larger amounts, their future income streams may be coming from a declining business,” Mr Price said.

The Australian Shareholders’ Association’s Ms Smits said investors should do their research before buying any stock, “regardless of its dividend yield”.

“Investors should be careful when chasing higher dividend yielding stocks, as while a high dividend yield can be attractive, it is important to remember that there are risks involved,” she said.

“Some struggling companies may pay high dividends in an attempt to attract investors, but this does not mean that the company is healthy as a high dividend yield can sometimes be a sign that a company is in financial trouble.”

Originally published as Dividends solid as resources stocks dig up more cash for investors