Dividends will take on added significance for equity investors as a driver of returns, as the outlook for low or even negative earnings growth may be reflected in weak share price growth in the year ahead.
Analysts are advising equity investors to invest in stocks with secure income streams ad dividend payouts.
But this involves more than picking the usual high-yield stocks. Many companies will suffer falls in earnings over the next year or two and dividends may be cut or even suspended.
CommSec estimates that companies will pay out about $22 billion of dividends that were declared during the half-year reporting season last month.
The online broker says 87 per cent of the companies that reported half-year results last month declared a dividend – down from 88 per cent that declared a dividend at the full-year last year.
CommSec says 52 per cent of companies that declared a dividend last month increased that dividend. This was the lowest proportion of companies increasing dividends in six and a half years.
Macquarie Securities says companies dealing with falling earnings may need to prioritise operating expenses and debt repayments. This will drive dividend cuts and suspensions.
Macquarie has forecast reductions in dividends per share for 40 per cent of the ASX stocks it covers – that is 73 stocks.
So far, three companies have suspended dividend payments. They are Aurelia Metals, Blackmores and construction materials supplier Wagner Holdings.
In the financial crisis, 63 per cent of the stocks Macquarie was covering cut their dividends and 3 per cent suspended dividends.
“We would reach similar levels by the end of 2020.”
Suspensions are more likely in sectors directly impacted by travel bans and shutdowns, such as travel companies, the gaming industry and discretionary retail.
“The good news is that even in a crisis like the GFC, there were still some stocks that grew and rewarded shareholders with higher dividends. During that period 10 per cent of stocks under coverage increased dividends by 1 to 10 per cent, and 18 per cent increased their dividends by double digits.
“Companies that raise dividends full-year earnings reporting season are likely to be quality growth stocks that income investors should probably look to own.”
Macquarie recommends adding to holdings in Telstra, GPT, Dexus and Mirvac Group.
On the expectation that banks’ credit impairments will deteriorate, Macquarie recommends removing Westpac and NAB from portfolios.
UBS says: “Investors seeking a more stable source of return during this period of extreme volatility should consider names with defensive income streams.”
UBS has adjusted its Australian equity strategy to favour defensive income and growth stocks. Its overweights include infrastructure, consumer staples and real estate investment.
Two stocks it likes are energy infrastructure company APA Group and rail freight operator Aurizon Holdings. “They are two income names with highly defensive dividends.”
Aurizon now offers a 7.1 per cent forward dividend yield, a near record high. “We view the dividend as less likely to be cut, given its recent deal with miners, which is significantly positive for earnings certainty,” UBS says.
APA is offering a 5.8 per cent forward dividend yield, the highest since 2014. More than 90 per cent of its revenue is secured, with 80 per cent of APA’s business under commercially negotiated take-or-pay contracts. APA has never cut dividends since it was listed in 2000.
UBS is recommending an underweight position in financials, given the likelihood of an extended period of very low interest rates. However, it likes ANZ because it is trading on a cheap valuation.
And “given recent share price falls we like the quality defensive growth names CSL and Resmed. Woolworths is defensive and provides exposure to strong near-term sales.”
UBS says some of the stocks that risk further underperformance include AMP and IOOF Holdings. It says: “The equity market sell-off reduces wealth management income for AMP and IOOF, with net funds likely to be reduced due to market volatility.”