Maintaining dividend income in turbulent times

Dr Peter Gardner | Plato Investment Management

If ever a time proves the tried and trusted 'set-and-forget' approach to equity income doesn't work, it's now. Amid all the noise about Trump, tariffs and market turbulence, the big challenge for income investors in Australia is knowing where to move to get dividends and franking credits.

While a lot has changed in just a few months, let’s first look at some of the signals from the recent ASX companies reporting period in February 2025.

Dividend income foundations

The average dividend increase across the ASX during the February reporting period was 20%, according to internal Plato research.

Of course, averages can be skewed. For example, South32 Limited (ASX:S32) had an 800% increase in dividends. However the median dividend increase for all companies was around 5%. That means that, on average, a typical company has increased dividends greater than the rate of inflation.

While there’s a lot of uncertainty in global markets, dividends declared in the February reporting season provide a solid foundation for the outlook for dividend income during the rest of 2025.

For us, dividend highlights in February included Qantas Airways (ASX:QAN) re-instating dividends, and A2 Milk Company (ASX:A2M) paying a dividend for the first time.

On the flip-side, BHP Group (ASX:BHP), Rio Tinto (ASX:RIO), and Fortescue (ASX:FMG) cut their dividends. These cuts, however, came off the back of enormous dividends and special dividends delivered by the mining giants in recent years. The dividend bonanza from the miners lasted much longer than many experts anticipated.

Resource dividends have now cooled in line with the declining price of iron ore. However, the mining giants should remain high-yielding stocks:

• BHP announced a 50 cent (USD) dividend, which equates to a 6.7% annual yield.
• Rio Tinto announced a $3.55 (AUD) dividend, which equates to a 7.4% annual yield.
• Fortescue announced a 50 cent (AUD) dividend, which equates to a 10.2% annual yield.

[Note: Yields move around as share prices change, meaning the yield information above may not be current at time of publication.]

The biggest dividend cut came from Fortescue, because it's a pure-play iron ore miner.

It’s now a game of wait and see with regards to how China reacts to the trade war with the US. There is a possibility that China may choose to unleash large-scale stimulus, which could potentially support iron ore prices.

Given the uncertainty though, we remain positive on the more diversified Rio Tinto and BHP for dividend income moving forward.

Dodging the tariffs

Despite a lot of hyperbole about economic uncertainty, the Aussie consumer is still showing confidence.

Six months ago, spending was going backwards amongst younger people, but that's now turned positive, albeit greater spending power remains in the older age cohorts that own their own home.

Against this backdrop of global tariff turbulence, some of the key sectors that we remain positive on for the potential of delivering dividend income are domestic telcos, consumer staples, and financials.

For example, Telstra Group (ASX:TLS) reported a strong half-year profit increase of 7.1% (vs the prior corresponding period) in February. This was driven by increasing mobile revenues as Telstra continues to strengthen its dominance as Australia’s leading telco. Investors were rewarded with a 5% interim dividend increase, and they’re now getting an annual gross yield of around 6.5%. 

In the consumer staples sector, our view is that the Coles Group (ASX:COL) may continue its dominance over rival Woolworths (ASX:WOW) in the foreseeable future and we are likely to remain positive on Coles’ dividend outlook.

JB Hi-Fi (ASX:JBH) is also interestingly positioned. We consider JBH a bit more of a consumer staple these days, as people can't just cut back on things like home office electronics and mobile devices which have become a critical part of our personal and working lives.

JBH was able to increase half-year sales by almost 10%, increase profits by 8%, and noted strong January sales in its February results. It announced an 8% dividend increase.

Opportunities

Looking more broadly, the market sell-off in early April could potentially present opportunities to buy quality dividend-paying companies at attractive valuation multiples and yields, compared to earlier in the year.

We had become somewhat concerned that valuations of some Australian stocks had got ahead of fundamentals, such as company earnings or dividends (that is, valuations had risen too far). The silver lining for income investors is that dividend yields go up when share prices fall.

Risks to dividend outlook

Globally, a potential US recession driven by rising tariffs remains a key risk. US GDP forecasts have been downgraded, while inflation expectations have increased - factors that could prompt the US Federal Reserve to delay interest rate cuts despite signs of economic slowdown. The uncertainty surrounding tariffs may also lead businesses to postpone investment decisions as they await greater clarity.

A downturn in the world’s largest economy could impact our local market, particularly if consumer and business confidence take a hit. However, the risk of higher inflation in Australia remains low.

It’s unlikely that Australia will impose tariffs on imports, and US tariffs could even make our economy a more attractive destination for goods, particularly from China, potentially driving prices down. In such a scenario, the Reserve Bank may feel more comfortable easing interest rates, helping to counterbalance any negative sentiment.

Plato is also monitoring the risk of a slowdown in China and the potential for limited government stimulus.  ASX-listed companies with significant exposure to the Chinese economy - particularly major iron ore miners like BHP, Rio Tinto, and Fortescue - should be watched closely if China’s economy slows.

Bottom line on dividends in 2025

There are parts of Australia’s domestic economy that look more shielded from the tariff turbulence. Indeed, the volatility may provide opportunities for investors to build exposure to solid dividend payers at more reasonable prices.

The Australian equities market currently looks like it is still a good place to be. Keep in mind:

• Australian direct exports to the US are relatively small, and we have a tariffs at 10%.
• Countries most affected by the tariffs may look to export more goods to Australia at potentially cheaper prices, which could soften inflation.
• The potential policy response will be more interest rates cuts than had been expected – we now have economists predicting 1-2 more cuts this year. If interest rates are further cut, this could help families struggling with high mortgage rates and result in improved spending across the board.

There is much to be optimistic about in our domestic market. Equities still have the potential to generate superior income when compared to term deposits and fixed income.

First published on the Firstlinks Newsletter. A free subscription for nabtrade clients is available here.

Dr Peter Gardner is a Senior Portfolio Manager and co-founder of Plato Investment Management (AFSL 504616 ABN 77 120 730 136). Plato is an affiliate of Pinnacle Investment Management, a sponsor of Firstlinks. This article is for general information only. Any opinions or forecasts reflect the judgment and assumptions of Plato on the basis of information at the date of publication and may later change without notice. Any projections are estimates only and may not be realised in the future. This article is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. We would suggest individual investors seek professional tax advice based on their individual tax circumstances.

All prices and analysis at 28 May 2025.  This document was originally published on firstlinks.com.au on 28 May 2025 and has been prepared by Plato Investment Management (AFSL 504616 ABN 77 120 730 136), which is an affiliate of Pinnacle Investment Management. The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer.  This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice.  Past performance is not a reliable indicator of future performance.  Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB.  Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.