When it comes to setting an income stream from dividends, Australian investors look for equities that deliver consistent yields over years. However, the trend got derailed a bit in year 2017 when the top income stocks on ASX, including Telstra and the four major banks witnessed a heavy downfall in the share prices over the past 12 months and unfortunately did not deliver remarkable growth in dividends. Dividend contribution from these five entities has otherwise been identified to contribute about 40 per cent of the total dividend generated from the top 200 listed companies. With time, it has been noted that investors who have the hunger for dividend growth have realised that these high-dividend paying stocks also bear capital risk to some extent.
In past two years, Australia and New Zealand Banking Group Limited (ANZ) that agreed to sell about 16 businesses to simplify its portfolio and reduce its operating risk, made it easier for the investors to regain some confidence on the dividend sustainability. However, Royal commission into the banking sector, changes in the market conditions with new tax reforms and liquidity requirements have been seen as threat to the proliferating dividend yielding scenario. Further, in 2017, while the banking sector stocks provided good yields, the share prices were down a lot. For instance, National Australia Bank Limited’s (NAB) share price has been down by 13.8 per cent in the past one year despite being one of the top dividend stocks.
If we talk about Telstra, it has a decent yield of 7.42 per cent and now is planning to recommence the Dividend Reinvestment Plan from FY18. It was observed that Telstra’s dividend dropped by almost a third over the past 12 months at the back of the challenges that the group faced last year. The share prices were down by 24.7 per cent in past one year while return on Invested Capital of about 11.6 per cent remained unchanged from 2016 to 2017.
Given this scenario, investors may want to diversify the portfolio and also look at options with income and capital rise. For instance, Woolworths, Suncorp and IOOF are some examples that can be looked at and held for long-term based on the strategies adopted by the groups. Woolworths, for example, is committed towards its progress on transforming its business at sustainable levels to drive shareholder value in long term. The Company announced an interim dividend of 43 cents, up from last year’s interim dividend. Another stock is Magellan Financial whose interim dividend has increased over time and the group has strong fundamentals for future growth.
Therefore, sometimes investments in banks or high yielding stocks can be diverted to other income stocks that might have more potential looking at the macro picture in totality. In other words, investors can have a balanced portfolio with exposure to banks with decent underlying potential and stocks to the likes of Telstra that are capable of regaining their lost lustre (as seen at the back of latest efforts), along with stocks that are emerging to have good sustainable income streams in the future.
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