Smaller companies can mean bigger yields, but tread carefully
Investors who venture beyond the blue chips can be rewarded with higher yields, but watch the dividend traps.
Investors are about to have their pockets filled with dividend largesse – mainly from the blue chip end of the market – but are better rewards on offer?
According to Commonwealth Securities, just under $35bn will be paid – or was dispensed – in divs between August and October.
This sum is 5 per cent up on last year’s tally.
But yields are forecast to decline this financial year, either because companies don’t expect to do so well and will crimp their payouts, or because of share price appreciation (which is not such a bad thing).
The banks – the most popular source of reliable divs – are forecast to yield an average 4.2 per cent, plus a 1.8 per cent franking credit is considered.
But brokers put the allegedly overvalued Commonwealth Bank (ASX:CBA) – the most important single source of investor income – on a forward yield of a mere 3.4 per cent (albeit fully franked).
Across the ASX 200 stocks, yields are forecast at 3.6 per cent, well below the long-term average of 4.5 per cent since 2000.
In reality, most investors will hang on to the bank shares and the old dividend faves Telstra (ASX:TLS), Wesfarmers (ASX:WES), Woolworths (ASX:WOW) and Coles Group (ASX:COL) to fund their retirement.
But sometimes it pays to stray from the worn path, especially as waning consumer sentiment is likely to affect these domestic-focused stalwarts. In their quest for higher yields, investors need to be cautious about taking published figures at face value.
The payouts simply may not be sustainable, or the company’s business is cyclical, such as resources. Fortescue Metals Fortescue Metals Group (ASX:FMG), for instance, yields about 8 per cent now but with wilting iron prices that’s expected to abate to about 5 per cent this year.
Formerly IOOF, wealth adviser Insignia Financial (ASX:IFL) was on a doubledigit yield a couple of years ago, but in August it “paused” its dividend “to enhance strategic and balance sheet flexibility”. That said, there are plenty of small to mid-caps yielding 6 per cent more with reasonable prospects.
While Transurban Group (ASX:TCL) yields 4.5 per cent, European and US toll road operator Atlas Arteria (ASX:ALX) returns about 7 per cent. European toll pricing is government-regulated, which means regular agreed price increases. In the property trust sector, Centuria Office REIT (ASX:COF) yields more than 10 per cent, although investors need to decide whether the office rout is abating or only just beginning.
A safer bet might be the Hotel Property Investments (ASX:HPI), which owns 60 properties – mainly pubs – on a 6.5 per cent yield which sure beats the pokies.
Wealth manager Platinum Asset Management (ASX:PTM) has seen better days, but pays a yield nudging 10 per cent while management’s turnaround magic works.
Do watch those dividend traps, though.
As IG Markets puts it: “Many investors are caught out by the siren song of ultrahigh yield percentages without considering the whole picture.”