Q: What are the best shares to invest in outside the big four banks that will provide me with a strong dividend yield?
A: At the end of the company reporting season, 88 per cent of full-year reporting S&P/ASX 200 companies paid out a dividend.
Of those companies reporting a dividend 54.9 per cent increased their dividend, 21.3 per cent cut and 23.8 per cent left their dividend unchanged. Dividends rose by 4.9 per cent, overall.
S&P/ASX 200 companies have currently paid around $5 billion in dividends since July and this is expected to increase to a total of $29.2 billion by December.
The highest yielding ASX 200 stocks from the last financial year are listed below.
While there are plenty of companies paying dividends and dividends are growing, not all stocks that pay high yields have capital growth. Investors should look at the total return, and not just the yield.
Scott Kelly, portfolio manager of DNR Capital’s Australian Equities Income Fund, says: “High yields can be indicative of a company that is at risk of cutting dividends.”
Investors should be looking for shares that have a high yield and a sustainable share price, to avoid losing value.
Kelly says the low cash rate puts pressure on income-seeking investors and yields on equities continue to look attractive relative to other asset classes but is risky.
Kelly says: “We believe that growing a sustainable income over time above inflation is more important than simply chasing yield, particularly for retirees.”
The DNR Capital Australian Equities Income Fund is underweight in banks because of a concern that low interest rates could put margin pressure on the banks, which could flow through to lower earnings and pressure on dividends.
Kelly selects stock for the DNR Australian Equities Income Fund based on the following characteristics:
Growers: high-conviction stocks that may be paying a below-market dividend yield that have growing income profile in the medium term, such as James Hardie and REA Group.
Compounders: quality stocks operating within a robust industry structure that have a strong competitive position and sustainable income growth, such as Lendlease and Macquarie Group
Cows: stocks with a solid balance sheet and capital management potential that are being undervalued on traditional earnings-based metrics, such as Aurizon and BHP.
Yielders: Quality companies at attractive valuations that are delivering sustainable and cash-backed dividends, however with little growth – Suncorp and Spark New Zealand.