Over the past three decades, Australian stocks have proved a good source of income for investors, and in particular retirees, thanks to the added benefits of franking credits. 

In more recent years, it’s been an interesting ride for dividend investors. Since the tumultuous COVID-19 period in FY21 when the S&P/ASX 200 index yielded just 2.9% cash and 1.0% franking there has been a sharp rebound.  

In FY22, investors received 5% gross income including cash and franking, according to Plato analysis. 

In FY23 it was 6.1% plus some big bonuses including off-market buybacks from Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corporation (ASX: WBC), Woolworths (ASX: WOW), and JB Hi-Fi (ASX: JBH), along with special dividends including BHP’s significant distribution of Woodside Energy Group (ASX: WDS) shares which came in the form of a fully franked dividend.

So, what’s next? After this volatile period, Plato projects a normalisation in the environment for Australian dividend income. 

[Editor’s Note: Do not read the following commentary as a recommendation on any stock or sector mentioned. Stocks are included for illustrative purposes only. Like all investment strategies, income investing has risks. These include a reduction in, or shelving, of a company’s dividend or lower-than-expected franking credits. Higher inflation also affects the real return from dividends].
 

Key dividend sectors

As we move into FY24, Plato believes investors find themselves navigating one of the more complex investing environments in recent times. There is much focus on the Reserve Bank’s next move with interest rates, concerns about increasing pressure on consumer spending, a heightened level of geopolitical uncertainty, and the elephant in the room – inflation. 

While equities should continue to be a pillar of strength in income-generating portfolios, in Plato’s opinion, investors must navigate increasing divergences in dividend payouts within and across sectors, meaning that active management of portfolios to capture the best dividends will be critical. 

Here’s a look at three key sectors:

1. Financials

Recently there have been some disappointing results from the big four banks, with net interest margins [the difference between interest received and paid] dropping after intense competition including cashback offers, as well as some concern about the outlook for the housing market and pressure on households from the closely watched “mortgage cliff”. 

Despite this, the banks have generally increased dividends as their balance sheets are strong, but perhaps not by as much as some investors had hoped for.  

Banks will remain a source of sound yields in diversified income portfolios, in Plato’s opinion. However, Plato does not anticipate strong dividend growth from the banks in the foreseeable future. 

Insurance stocks, on the other hand, look to have a stronger case for strengthening dividends in the year ahead, in Plato’s view.  Plato thinks yields in the insurance sector can improve after a recent period of weakness when insurance-company balance sheets suffered from high claims. There have recently been widespread premium rate increases and insurers usually perform better in a more normalised non-La Nina climate period. 

2. Mining and energy 

There have been record dividends, special dividends, and franking credits from mining stocks in recent years. 

Is it time to cut and run? Well unfortunately that’s what too many investors Plato speaks to have done – anticipating the crash of iron ore prices and other headwinds. But it’s easy to overlook how diversified many of Australia’s great mining businesses are. 

Take BHP for example. In FY22, it posted net profits of US$22.4 billion. That was up 64% on 2021 when many investors said “sell BHP” because they tipped it was the top of the iron ore cycle. But last year, it was coal that provided a windfall, generating about US$9.5 billion for the company.

While it’s true that dividends from big miners can be heavily influenced by the iron ore price, this can be dependent on the at-times unpredictable shape of China's economy. 

At the time of writing, Plato believes there are good signals emerging from China. Unlike the monetary policy tightening in the west, China has the firepower to continue to stimulate its post-lock down economy, and inflation there remains low. 

So, generally, Plato is again cautiously positive on mining dividends for the year ahead, after we saw some falls in the second half of 2022 from a high base.  

When it comes to the energy sector, this is another area Plato is cautiously positive on and a sector that could be important in dividend portfolios in the year ahead.  

The recent strength in gas and coal prices should support strong yields, however capital expenditure is something to watch as this naturally puts pressure on the level of cash that companies pay out. 

3. Consumer stocks

This is one part of the market where investors must do extra homework on dividends. However, good dividends from this sector could be available if you know where to look, in Plato’s view.  Across the sector, Plato is cautious that some companies have seen sales starting to drop as inflation and higher mortgage repayments take their toll on household budgets.

Dividend investors can have more confidence in strong consumer staples businesses. Woolworths, for example, recently said it is seeing evidence of food inflation moderating and noted that supplier price increases were stabilising. 

Finally, Plato believes the prospect of good dividends from telcos looks to be improving with a more rational pricing environment. Are we about to see Telstra Group (ASX: TLS) return to dividend darling status? Time will tell. 

Unlocking stronger dividend income

At an index level, Plato Investment Management is projecting the ASX 200 index to generate 5.5-6% yield including cash dividends and franking credits in FY24. 

However, Plato reiterates that with astute stock selection that avoids dividend traps, along with active and tax-effective portfolio management, investors can potentially generate additional income on top of the index level yield.

And remember there’s only one free lunch when it comes to income – diversification! 

DISCLAIMER

Please Note: Everyone’s circumstances are different. This article contains general information only, and you should seek professional advice before making any financial decisions. Stock commentary is illustrative only and not a recommendation to buy, hold or sell any security.

All content in respect of the Plato Australian Shares Income Fund (ARSN 152 590 157) (the Fund) is issued by Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238 371 (“PFSL”) as responsible entity of the Fund and is prepared by Plato Investment Management Limited (ABN 77 120 730 136) (AFSL 504616) (“Plato”) as the investment manager of the Trust. PFSL is not licensed to provide financial product advice.

The information provided in this article is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs. Before making an investment decision in respect of the Fund, you should consider the current product disclosure statement (PDS) and Target Market Determination (‘TMD’) of the Fund and the Fund’s other periodic and continuous disclosure announcements lodged with the ASX, which are available at www.asx.com.au, and assess whether the Fund is appropriate given your objectives, financial situation or needs. If you require advice that takes into account your personal circumstances, you should consult a licensed or authorised financial adviser.

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