2 ASX sectors and a stock that no longer deserve their "dividend darling" reputations

As we have demonstrated in a previous article, there are no companies on the ASX (yet) that qualify for dividend aristocrat status (although Soul Patts is very close). 

But several stocks have long-running streaks of increasing their nominal dividend payouts year-on-year. Surprisingly, none of them are the companies that are often touted to be "dividend darlings" (think the Big Four and the miners). 

In addition, while some "dividend darlings" may bear an appealing dividend yield, it's better to focus on the companies that have a track record of increasing incomes over time rather than just buying a well-known company that has a lofty dividend yield - as a recent episode of The Pitch featuring Michael Wayne of Medallion Financial revealed.

"There's capital growth and there's dividends. So if dividends are growing over time on a per-share basis, then there's a very good chance that the valuation of the company is growing as well," Wayne told my colleague Ally Selby recently.

With this in mind, this piece will look at the ASX companies bearing the highest dividend yields - and what it says about the market today. Then, with the help of Aaron Binsted from Lazard Asset Management, we'll take a closer look at some companies that have a "dividend darling" reputation that perhaps don't deserve it anymore. 

And, just because we like to be good sports around here, we'll then take a closer look at three under-rated companies that deserve a closer look for their income-paying properties.

But first... The data:

First things first, 11 stocks currently have a trailing dividend yield of more than 10%. Coal miner Yancoal (ASX: YAL) is at the very top of the list with a dividend yield of close to 20%. It's not the only coal miner on the list either, as New Hope Corporation (ASX: NHC) is also on the list. Two fund managers also make the list in Magellan Financial Group and Platinum Asset Management. 

That said, having a high yield is no guarantee of share price appreciation. Only three of the top 10 have recorded a positive 12-month share price return. And, of the 116 ASX-listed entities that have a dividend yield of over 5%, just 60% of them have recorded a year-on-year share price appreciation at all.

So what does that say about high dividend-yielding stocks? Binsted's view is as follows:

"Whenever I am introducing our Defensive Australian Equity fund to potential investors, I always tell people the strategy will never have the highest percentage yield amongst income fund peer set. This dividend stock list is a good example of why that is the case," Binsted says.

"Many of these names have low certainty for future cash flows and therefore have an elevated risk of dividend cuts and potentially capital loss."

He says the far better option is to look at companies that have solid yields but still have the capacity (and cash) to grow their share price.

"Our approach is to target a solid percentage yield combined with capital growth to grow investor income dollars. I would expect this list to be quite different in 12 months as the highest percentage-yielding stocks also tend to be much more volatile than the index - both positively and negatively," he says.

Dividend darlings (which no longer deserve that status)

With this premise as a basis, we then challenged Binsted to share three well-known companies that generally have a good reputation among income investors but perhaps need to be examined more critically.

The Big Four Banks: "As a sector, this group has not delivered any dividend per share (DPS) growth in a decade and the star of the bunch, Commonwealth Bank (ASX: CBA), has not kept up with inflation. That doesn’t mean one should never own the banks but unless tracking the index is a key objective for the strategy, the weight should be very different to the benchmark and it should increase and decrease with the opportunity set."

Fortescue (ASX: FMG): "Another company that has had a high dividend yield but perhaps warrants caution in terms of dependable income is Fortescue. Fortescue's assets are higher on the cost curve than the majors when adjusted for quality and long-term strip ratios, there is a reasonable amount of debt on the balance sheet and management is investing in projects that may not produce much cash flow in the near term."

The ASX REITs: "REITs are a sector of dividend stalwarts, but some individual stocks may house elevated dividend risks due to high gearing. Everyone knows there is pressure on asset values. A high yield may not save you, or be sustainable if the debt burden is too great to manage the valuation adjustment."  

3 (soon to be) dividend darlings

Then, in the spirit of always trying to get you a forward-looking investment idea, we asked Binsted to share three companies that don't always get a mention among income investors but perhaps deserve a closer look.

"The two domestic general insurance players, Suncorp (ASX: SUN) and Insurance Australia Group (ASX: IAG) fit the bill. Strong premium growth will drive future dividends, a history of returning capital, solid balance sheets and an improving asset mix in Suncorp’s case all add to the attraction from a dividend perspective," Binsted says.

And despite sounding a warning bell on the REITs, Binsted does like one REIT for its income and capital growth properties.

"And the third is Waypoint REIT (ASX: WPR). Waypoint has a high-quality income stream due to the triple-net lease structure. It is important to be aware, however, that while the level of dividend is good, there will be limited growth as the debt is re-priced and due to the fixed escalators in the leases and long weighted average lease expiry (WALE)," he adds.

Defence is the best form of attack

Aaron's Fund has historically provided capital growth and income that is consistent with the Index with less than half the drawdown, compared to the Index in negative markets. Find out more here.

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