Rudi’s View: Reliable Dividends On The ASX

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | May 15 2020

Dear time-poor investor: a line-up of reliable & sustainable dividend paying companies on the ASX

In this Rudi’s View:

-Reliable Dividends On The ASX
-Rudi Talks

Reliable Dividends On The ASX

By Rudi Filapek-Vandyck, Editor FNArena

In Part One of this week’s Weekly Insights I, hopefully, convinced you all that owning a basket of stocks that happen to offer a high yield, with or without franking, is not the smartest investment strategy.

Part Two zooms in on where to find reliable yield in a covid-19 impacted Australian share market.


The share market absolutely loves companies that grow their dividends consistently over a long period of time.

There are two ways to achieve this. Either a business continues to grow its sales and cash profits, which then allows for dividends to rise while keeping the payout ratio steady.

In the absence of such a straightforward concept, company boards can also “manufacture” growth.

Investors do not always pay attention to the finer details, and thus companies who don’t have the luxury of a booming business with growing revenues can still achieve growth through, for example, lifting the pay-out ratio or raising capital or taking on debt.

The banks and Telstra, two of the main Go-To destinations on the ASX for income-hungry investors, have exactly done that at various stages over the decade past.

It’s not a sign of a healthy set-up, but desperate investors and desperate boards simply went along with it in the hope the band aid could cover up the underlying wound for much longer.

There is another way of creating growth and that is by slashing the dividend by a large percentage; say -50% or more.

After that, growing the dividend becomes a lot easier in the subsequent years. It doesn’t necessarily mean the business has to rediscover its prior mojo, just a little bit of normalisation out of the deep quagmire should suffice.

I don’t think Telstra has reached this point as yet, but the banks look like they are setting themselves up for just such a scenario.

It’s a bit early given we are still in the embryonic stage of the 2020 recession and banks have only just started to defer and reduce their dividends, but maybe in twelve months from today, they might be in a position to announce higher dividends compared to this year.

In the right context and with the right market sentiment, that might just be all investors need to hear. And given dividends will likely have been cut dramatically this year, the banks’ story about growing dividends can easily last 3-4 years without a booming context for the sector overall.

(Nobody cares by then that dividends had to be slashed first. The share market is forward looking, remember?)

In the short to medium term, of course, banks have nothing but negative news to share with their shareholders even though this is not a situation of their own making.

One thing once again stood out this week and that is CommBank ((CBA)) showing everyone why its shares trade, and will continue to trade, at a sizeable premium to the rest of the sector, through the release of a relatively resilient quarterly performance update.

I’ve said and written this many times over in the past I-don’t-know-how-many-years, the lower yield with the premium share price does not mean CBA is “expensive” or that the other banks are more attractive.

On a risk-reward balanced view, it’s the exact opposite. And investors once again have been presented with the evidence.

The observation to add here is the relative gap between CBA shares and the rest of the sector has blown out considerably, which might weigh on the CBA share price short-term and/or allow the other banks to close the gap (exact timing unknown).

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