As widely known now, stocks that pay high dividends on a sustainable basis make up a significant part of the ASX Income portfolio as the investors keep on receiving consistent returns of the share market through such stocks. However, the portfolio now seems to have witnessed a jitter with recent developments at individual stock level and macro scenario at large.
The top income stocks on ASX that have been eyed and grabbed by many investors for years, include the big four banks and Telstra, which have recently caught attention with respect to their dividend paying capabilities. These stocks have been said to contribute to about half of the dividends paid in 2017. However, the recent financial performances have led some of these stocks trade on a downswing with dividend cuts being introduced to a large extent. For instance, Telstra has slashed its dividends by about 30% for next year at the back of the earnings hole and competitive landscape. As a result, top shot mining stocks and utilities’ stocks have started looking more appealing to some investors. For instance, BHP Billiton has declared a higher dividend this year and this in a way fills out the gaps made by the likes of Telstra. But at the same time, it is recollected that BHP had cut its dividend by 75% in 2016 at the back of lower than expected financial performance and commodity price movement. Fortescue is another miner that has paid good dividends to the shareholders recently.
Importantly, the dividend fluctuations now seem to be decided based on respective company’s financial position keeping the macro environment in mind. The dividends should, however, not be merely based on unsustainable short-term conditions. For example, some miners base their dividends simply on commodity price movements. It is also noted that some players such as those in real estate sector borrow money for dividend payments, which need to be then assessed with care. Conversely, the banks might still be able to sustain a good chunk of dividend pie although the same have been lately bearing the impact from industry-wide challenges and the bank levy. For instance, Commonwealth Bank has been hit hard by the civil penalty orders from AUSTRAC with regards to breach of money laundering act but the bank could still raise its FY17 final dividend by about 4%. In general, an anaemic interest rate and growth environment becomes crucial for high dividend players; and an interplay between profit growth and dividend paying capacity based on financial position sets the game for better returns. At the same time, high and sustainable dividend pay outs indicate the confidence a company has on its future earnings.
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Dividends in AUD (Source: ASX)
So to say, there might be an income portfolio remix with some stocks emerging high, some sailing neutral and some stocks touching the dip in different time spans.The thumb rule sticks with having a balanced exposure to high dividend stocks to attain security during market uncertainty and mitigate portfolio concentration risk.
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