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The Australian sharemarket has seen a notable shift as dividend cuts from major iron ore producers prompt investors to reassess their portfolios, moving away from resource stocks in favor of ASX dividend stocks, such as insurers and industrial companies, for income generation.
In the August reporting season, S&P/ASX 200 companies declared $34.4 billion in dividends, marking the lowest amount since 2020, when businesses grappling with capital constraints returned only $21 billion to shareholders. This decline follows a period of unprecedented dividend payouts, driven by a booming resources sector that saw a record $112.3 billion distributed in the 2022 financial year.
For the 2024 financial year, Australian companies are projected to distribute $101.2 billion in dividends, reflecting a 5% decrease from the previous year. This trend indicates a significant shift in the market dynamics, with fewer resources stocks delivering the high returns seen in the past.
The decrease in dividends from key players such as BHP Group Ltd (ASX:BHP), Fortescue Metals Group Ltd (ASX:FMG), and Woodside Energy Ltd (ASX:WPL) underscores the change. BHP reduced its final dividend by nearly 10% as it reallocates resources to future-oriented projects like the Jansen potash mine in Canada and expanding copper operations in South Australia. The miner’s full-year dividend of $US1.46 now represents 54% of its underlying earnings, the lowest payout ratio since it revised its dividend policy in 2016.
Similarly, Fortescue increased its full-year payout, but this was offset by a 12% reduction in its final dividend, reflecting lower iron ore prices. Woodside also cut its interim dividend by 14% as it invests more heavily in low-carbon energy projects and new oil and gas fields.
These companies, while still among the top dividend payers, collectively contributed $1.5 billion less in dividends compared to the same period last year. Yancoal Ltd (ASX:YAL) and Pilbara Minerals Ltd (ASX:PLS) did not declare dividends last month, and Mineral Resources Ltd (ASX:MIN) omitted its final dividend for the first time in over a decade.
In contrast, the insurance sector has seen substantial increases in dividends. Insurance Australia Group Ltd (ASX:IAG) nearly doubled its final dividend, Suncorp Group Ltd (ASX:SUN) raised its payout by 63%, and Medibank Private Ltd (ASX:MPL) increased its dividend by 13%. This trend highlights a rotation towards industrial and insurance stocks as investors seek stable income growth amid shifting market conditions.
Hugh Dive, Chief Investment Officer at Atlas Funds Management, notes that investors are moving away from mining stocks due to significant capital expenditure plans and instead are focusing on insurers and industrials for more reliable income streams. This shift is also reflected in Morningstar’s income portfolio, which excludes traditional dividend payers like Commonwealth Bank (ASX:CBA) and Fortescue in favor of companies like Bapcor Ltd (ASX:BAP), Aurizon Holdings Ltd (ASX:AZJ), and Telstra Corp Ltd (ASX:TLS).
Despite the low dividend count in August, which is the lowest in four years, dividends remain higher than pre-pandemic levels. The expectation is that some of these dividends will flow back into the market later in the year, potentially boosting investment activity in the months ahead. Historical patterns suggest that if the market remains weak in September, institutional investors may delay their investments until mid-October, with a potential resurgence in November.
