Five companies with reliable strong dividends

Income-oriented investors did not enjoy company reporting season, which delivered a 36% fall in aggregate dividend payments to investors, with about 55% of companies cutting their dividends or dropping them.

Many stocks considered dividend stalwarts failed to live up to their billing, with Commonwealth Bank pruning its final dividend by 57%, ANZ and National Australia Bank cutting interim dividends by 70%, and Westpac confirming that it would not pay an interim dividend at all, and saying it would reassess dividend payments at its full-year results in November.

And while Telstra managed to hold its fully franked full-year dividend steady at 16 cents, the telco reported a set of numbers that had analysts concluding that it may struggle to do so in the current financial year.

So where do investors look for yield?

In a market like the present, the focus should be on sustainability of the dividend flow – not the highest dividends, or best yield “on offer.” Investors have seen that no dividend amount can really be relied upon, as being 100% certain.

With that in mind, here’s a group of five stocks that stand out for the relative reliability of their dividend outlooks.

Rural Funds Group (RFF:ASX)

Market capitalisation: $761 million

Three-year total return: 7.9% a year

Analysts’ consensus estimated yield FY21: 5%, unfranked

Analysts’ consensus valuation: $2.43

Rural real estate investment trust (REIT) Rural Funds Group is a very handy way to invest in Australian agriculture, from a protected position – as the landlord. The trust has agricultural tenants growing produce on its land on long-term rental contracts – tenants such as ASX-listed pair Select Harvests and Treasury Wine Estates, beef processor JBS and Singaporean agribusiness giant Olam International, which grows cotton, almonds, pulses, cocoa and dairy in Australia. The company’s land portfolio is now based around almond orchards, vineyards, cattle, cotton and macadamia assets. RFF offers a healthy – but unfranked – yield, and scope for further price recovery, as confidence increases in the sector on the back of healthy rainfall in many (not all) of the nation’s farming areas.

For FY20, RFF paid a distribution of 10.85 cents, up from 10.43 cents a share in FY19, continuing a strong track record of increasing payouts. Stock Doctor’s analysts’ consensus expects 11.3 cents in the current financial year, and 11.7 cents in FY22 – unfranked. That places RFF, at $2.25, on a 5% forecast unfranked yield for FY21, and 5.2% in FY22.

Charter Hall Long WALE REIT (CLW:ASX)

Market capitalisation: $2.4 billion

Three-year total return: 12.8% a year

Analysts’ consensus estimated yield FY21: 5.9%, unfranked

Analysts’ consensus valuation: $5.47

Yield-oriented investors looking at property exposures should be doing a bit of “WALE-watching” – in a market buffeted by rental concerns (and outright disputes) on the back of the COVID, the weighted average lease expiry (WALE) of a portfolio is a crucial statistic. And because it was established precisely to focus on long-WALE leases, CLW is really coming into its own.

In terms of portfolio, it is also a well-diversified REIT, spread currently across industrial assets (29%), offices (27%), retail (27%), telco exchanges (10%) and agriculture (7%). Occupancy remains at 99.8%, and the weighted average lease to expiry is 14 years – in other words, the trust has long-term agreements in place with tenants locked-in. That makes CLW a highly defensive asset, into which investors have piled since the COVID Crash slashed its price to $3.53 in March.  

For the year ended 30 June 2020, CLW paid a distribution of 28.26 cents for FY20, unfranked, up from 26.65 cents in FY19. Stock Doctor’s analysts’ consensus expects 29.3 cents in the current financial year, and 30.6 cents in FY22. At $5, that places CLW on an unfranked yield of 5.9% for FY21 and 6.1% in FY22, with a relatively high degree of likelihood for these projected payouts.

Coles (COL:ASX)

Market capitalisation: $22.8 billion

Three-year total return: n/a

Analysts’ consensus estimated yield FY21: 3.6%, fully franked (grossed-up, 5.2%

Analysts’ consensus valuation: $19.89

Supermarkets and liquor giant Coles paid a fully franked dividend of 57.5 cents in FY20, its first full-year as a separate listed company, after being spun-off from Wesfarmers in November 2018. Coles’ stated dividend policy is to aim to consistently pay out between 80%–90% of its earnings as dividends: the FY20 payout came at the lower end of this range, at 81.9%, meaning that Coles has quite a bit of scope to lift its dividend payout going forward. In fact, of you look at analysts’ consensus forecasts, they expect a payout ratio of 82% in FY21, rising to 84.4% in FY22 – with earnings per share (EPS) expected to steadily rise, from an economically very defensive earnings stream, the dividend flow should also push higher.

This financial year, to June 2021, Stock Doctor’s analysts’ consensus expects 61.5 cents, followed by 66.6 cents. If that’s borne out, this positions Coles (at $16.96) as offering an expected fully franked yield of 3.6% this year, or 5.1% grossed-up; rising to 3.9% (5.6% grossed-up) in FY22. Again, that is not the highest dividend yield available on the market, but it’s very solid, and even more importantly, investors can see exactly where it comes from – giving them confidence that this dividend stream can grow well beyond the horizon of analysts’ forecasts.

APA Group (APA:ASX)

Market capitalisation: $12.4 billion

Three-year total return: 11.5% a year

Analysts’ consensus estimated yield FY21: 4.8%, 34.1% franked (grossed-up, 5.6%

Analysts’ consensus valuation: $11.24

Gas infrastructure heavyweight APA is another stock with a stand-out record of steady dividend growth – APA has not lowered its dividend for 17 years. That track record is built on the back of the group’s huge national gas pipeline network, which generates reliable annual cashflow. But the FY20 result disappointed investors somewhat.

APA had previously downgraded its earnings guidance to factor-in the impact of COVID on gas volume demand, and while EBITDA – earnings before interest, tax, depreciation and amortisation, and the figure most closely watched by the market – rose by 5.1% in the year to June 30, to $1.653 billion, which was toward the higher end of the restated range, APA told the market that EBITDA for FY21 was expected to be between $1.625 billion–$1.665 billion. Not only did that fall well short of analysts’ estimates – which were for $1.7 billion-plus – it mooted the possibility of a profit fall. For a yield stock, that was disappointing news.

However, most analysts consider a flat outcome the most likely occurrence. Where APA paid a dividend of 50 cents in FY20 (franked to 34.1%), up from 47 cents in FY19, Stock Doctor’s analysts’ consensus expects 50 cents again in FY21, increasing to 52 cents in FY22, with both at the same franking level. At $10.32, APA is priced at 4.8% in FY21, the equivalent of 5.6% grossed-up; and for FY22, nominal 5%, grossed-up to 5.8%.

Rio Tinto (RIO:ASX)

Market capitalisation: $156.3 billion

Three-year total return: 20.2% a year

Analysts’ consensus estimated yield FY21 (A$): 5.3%, fully franked (grossed-up, 7.6%)

Analysts’ consensus valuation: $102.00

Don Hamson, managing director of income-focused active investor Plato Investment Management, was recently quoted as saying that Australia’s big iron ore miners “are the new banks when it comes to dividends,” on the basis that iron ore prices have held up well through the pandemic, because the world (particularly China) will need to spend big on infrastructure to recover from this pandemic-induced recession – and iron ore is the major input to steel.

That outlook has analysts projecting A$ fully franked FY21 yields of:

·      Rio Tinto: 5.3% (grossed-up, 7.6%)

·      BHP: 4.5% (grossed-up, 6.4%)

·      Fortescue Metals: 7% (grossed-up, 10%)

The downside there is that Rio Tinto and BHP are considered fairly fully valued at present – and analysts think that FMG has overshot full value.

While there is always uncertainty in terms of commodity prices and exchange rates – all three of these companies report their results in US$ – the potential for recovery could actually be under-stated in earnings expectations for the trio. Rio Tinto’s very strong balance sheet – its debt-to-equity ratio is in single figures – should give income-oriented investors a lot of confidence.