Investments in higher dividend yield stocks come into effect in case of two scenarios, first in the case when there is a consolidation in the market and another when the market is falling.
Investors look for value for their investments, hence intend to invest in such stocks which are expected to provide them consistent and substantial returns in any market conditions.
Two strategies to generate income via dividend stocks in an uncertain market:
‘Higher Dividend’ emphasizes investment opportunities with exceptionally high dividend yields but slower growth.
‘Dividend Growth’ emphasizes investment opportunities with lower dividend yield with dividend growth expectations in the coming years.
In 2018, global stock markets have found the going much harder, due to worries around global trade and other developments in geopolitical space.
With lower earnings growth, lower inflation and interest rate expectations in 2019, it is expected that higher dividend stocks will become increasingly valuable as the dividend in hand is more valuable primarily in an uncertain market.
Given a slower economic backdrop, investors can invest defensively in high cash flow companies with higher dividends, instead of dividend growth stocks which exhibits high valuations.
Janus Henderson Global Dividend index assists in measuring the progress of global firms in paying their investors an income on their capital. Its base year is 2009 with an index value of 100. It has risen to 187.3. It reports that the global dividends rose to a record $1.37 trillion, up 9.3% in the fourth quarter. Nine in ten companies globally increased dividends or held flat. It says that mining dividends rose fastest, in Australia, the UK and Russia, and the financial sector distributed the most in dividends, and pay-outs rose by 11.7% on an underlying basis, which is ahead of the global average whereas telecoms saw declines, with pay-outs flat or down in half the countries.
It expects underlying growth to slow slightly towards the long-term trend in 2019. For the year 2019, growth is expected to be around 5.1%. Global dividends are anticipated to reach $1.414 trillion. As per the dividend growth data by Janus Henderson Investors, dividend growth in Australia was noted at US$53.8 Bn in 2018 from US$53.3 Bn in 2017, and US$44.9 Bn in 2016.
Australian Market Outlook: The Australian economy has seen no recession for 27 years. With the growing risks on the horizon, economic growth should remain stable in the year 2019.
Rise in government spending and commodity exports has added a substantial contribution to national income and will help to ensure the pace in economic growth.
Australia’s workforce market has added more jobs in the near term, which has resulted in a decline in the unemployment rate and an increase in the participation rate.
Australia’s resource sector has contributed significantly to the economy, and the recent completion of LNG plants will increase production capacity and enhance economic growth over the next 12–18 months.
Strong growth in profits, low borrowing costs, increased capacity utilization for resource businesses and consistency in maintaining investments in Australia’s significantly expanded mining capital stock all point to growth over 2019 and 2020.
Major Challenges: Both housing activity and house prices are going backward in Australia, given the high growth rate witnessed in the past decade. Additionally, the current famine affected large parts of the country’s interior parts which troubled ongoing activities and created significant difficulties in some regional communities.
Chinese reply to the adverse effect of the ongoing trade war with the USA prompted the commodity prices (coal and iron ore) to rise higher than the expectations.
The significant decrease in house prices may affect the purchasing strength of household which will weaken consumer spending. It may put pressure on consumers to rely on wage increment to boost spending.
Two stocks with good dividend yields are- Telstra Corporation Limited & QBE Insurance Group Limited.
Telstra Corporation Limited (ASX: TLS)
Telstra Corporation Limited (ASX: TLS) has recently announced its H1 FY19 results where it reported EBITDA, total income, and NPAT down year over year in line with the expected NBN impact. The Group’s financial results were weighed by a further rollout of nbn™ network, with around 55% of premises now connected. After excluding NBN impact, it reported solid performance of the underlying business in the current market where 239,000 additional retail postpaid mobile services were added at a growth rate of 2.1%. Based on decent performance in 1HFY19 amidst challenges, the Board of Directors declared fully franked interim and special dividend of 5 cps and 3 cps, respectively.
The company anticipates good demand for telecommunication services and products to continue and the telecom infrastructure is most likely to gain significant importance over the next decade. With the onset of 5G, the telecom industry is expected to see improvement in Average Revenue Per User.
On stock performance, Telstra’s shares traded at A$3.13 with the market capitalization of ~A$37.23 Bn as on 1 March 2019. Its current PE multiple is at 11.99x, and its annual dividend yield was noted at 3.99%. Its 52 weeks high has been noted at A$3.433 and low at A$2.547. Its absolute return for the last 3 months, 1 year, and 5 years are 6.04%, -3.76%, and -36.34% respectively.
QBE Insurance Group Limited (ASX: QBE)
QBE Insurance Group Limited (ASX: QBE) has recently disclosed its results for FY2018. It reported a cash profit after tax of $715 Mn as compared to cash loss of $262 Mn in CY2017. Its net profit after tax (NPAT) was reported to $390 Mn (including a $567 Mn profit from the continuing operations) compared with a loss of $1,249 Mn in the year 2017. The strong result is attributed to the implementation of a rigorous performance management framework and upgrade of core capabilities in risk selection, claims, and pricing by the management of the company.
The 2018 final dividend increased to A28 cents per share from A4 cps in 2017. The combined dividend for the year 2018 becomes equal to A50 cps as compared to A26 cps in 2017, reflecting confidence in the balance sheet and improved earnings resilience.
It reported a reinsurance program for 2019 and announced about its three-year operational efficiency program targeting net cost savings of A$130 Mn, and an expense ratio of around 14% in 2021. Some of the important features for its reinsurance program include significantly reduced catastrophe retention, greatly increased protection against catastrophe severity, protection against the frequency of medium-sized catastrophes, significantly reduced large individual risk claim retention, improved protection against substantial individual risk claim severity, and increased quota share protection to reduce claims volatility further.
On stock information front, QBE last traded at A$12.56 up 1.7% (ASX: 4:00 PM, March 01, 2019) with the market capitalization of ~A$16.41 Bn. Its annual dividend yield has been noted at 3.98%. Its 52 weeks high has been noted at A$12.66 and 52-weeks low at A$9.28.
Risk Analysis: The dividend yield (cash) is calculated as a percentage of the annual dividends per share divided by the underlying stock price, multiplied by 100. A decline in share price provides an excellent opportunity to buy if there is a temporary fall and fundamentals of the business are sound. Now the concerning point for income investors will be whether the share price will fall further, or the dividends will be cut, or both.
It is explicitly mentioned in the company reports that dividends are paid over the company profits. So, if the company reports loss then, it may not declare dividends which can reduce the expected return for the investors.
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