FYI | Sep 09 2020
By Peter Switzer, Switzer Report
Professional fund managers who specialise in harvesting dividends are now having to go back to their drawing boards to rethink how they’re going to end up with a decent return. We know interest rates will be lower for longer and some economists think that the June quarter 7% economic contraction number means the RBA will cut the official cash rate to 0.1% from its current 2.5%.
This move will affect term deposits and in the context of a slow economy, this will squeeze dividends even more. The outlook for dividends has made Contango Asset Management change the income-orientation strategy for its Contango Income Generator (CIE), to one where it has recruited the world class fund manager WCM to generate greater capital gain returns for the fund, some of which will be used to deliver income!
The goal is to increase the total return. If it works, the share price of the listed investment company should improve as well.
However, for those who want to stick to ‘mining’ for dividends, they might have to do something unusual and that’s to rely on miners for a decent dividend. However, this kind of strategy (buying mining companies for income) can’t be a set-and-forget strategy. Those who try this trick might have to gamble on the miners as a short-term play before switching to others.
Right now, we know the banks have been virtually told by APRA to cut their dividends to build up more safety in their balance sheets. And they’ve also been asked to play ball in the economy’s rescue, which means their profits (which are the basis of their dividends) have been negatively affected.
Meanwhile, the other old reliable dividend-payer, Telstra, is hardly living the life of Riley, with 5G and other telco operator challenges. Some analysts think its dividend could be under pressure soon.
This leaves the question: where do we go to find reliable dividend payers? And can I find ones that might even offer some decent share price upside?
My colleague James Dunn has gone fishing for income-payers here in today’s Report and has nominated APA Group ((APA)), Charter Hall Long WALE REIT ((CLW)), Coles ((COL)), Rural Funds ((RFF)) and Rio Tinto ((RIO)). I’ll go looking for another group that should deliver on income.
Even though I’m looking for reliable dividend stocks, the impact of the Coronavirus can’t be taken for granted, so dividend-harvesters will need to review their holdings more regularly. The strategy of buy, set and forget could be risky.
1. Let’s hear it for Amcor ((AMC))
FNArena’s Rudi Filapek-Vandyck says a great standby income-payer is Amcor, even though there are no franking credits.
Complicated analysis aside, Rudi tells us that “…Amcor stands out in the 2020 context as a reliable, sustainable payer of dividends to shareholders, and the board doesn’t need to slash this year’s dividend first in order to secure growth.
“The odds are very much in favour of Amcor not paying out less than last year, at a time when many others are cutting or not paying out anything at all.”
This suggests that a yield of around 4% plus is on the cards. And the best bit is that the analysts on Rudi’s website forecast AMC has 12.5% upside. Income plus capital gain is the kind of investment we all need right now.
2. There’s no substitute for quality
The pointy-headed quant-types at Morgan Stanley say you can bet on quality companies and their history of delivering on dividends.
They’ve come up with a list of ones they like but I thought I’d throw in an additional filter based on what the analysts think these companies have for upside share price growth.
I’ll give you my filtered-down list with the projected share price upside from the analysts:
(These numbers don’t allow for franking credits.)
3. A few words on the Centuria Industrial REIT ((CIP))
The team at Morgans ran their eye over some reliable dividend payers and one that shows up a lot with my experts on my TV show is the Centuria Industrial REIT, which the analysts think has a 5.1% upside in price and a forecasted dividend of 5.6% for 2021.
4. I like Orora ((ORA))
And another company that Morgans likes, which I’ve liked for some time too, is Orora. This is the local breakaway business from Amcor, which not only has a projected dividend yield of 5.1% for 2021 but also the analysts see its share price spiking by 14.9%.
So I’ve provided a good group of quality companies with a good outlook for dividends and potential for share price upside.
One final point.
We’re chasing income because term deposits interest rates are so low nowadays. But as we move away from the safety of government-backed deposits, we’re going up the risk curve. So always remember that these companies could encounter a business problem and their promising returns could disappear.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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