Buy Hold Sell: 5 of the highest-yielding stocks on the ASX

On Wednesday, the Australian Bureau of Statistics announced that inflation had surged 1.8% higher in the third quarter, taking the headline inflation rate for the past 12 months to an eye-watering 7.3%. For some context, this is the highest quarterly print since June 1990. 

So what does this mean for income investors? Particularly those who rely so heavily on yield? 

Well, capital appreciation aside, it means that higher inflation is eating into real yields. For example, if a stock has an annual yield of 6%, at this rate, you are still losing a significant percentage of your hard-earned cash. 

So in this episode, Livewire's Ally Selby was joined by Plato Investment Management's Dr Don Hamson and Wheelhouse Partners' Alastair MacLeod for their analysis of five of the highest-yielding stocks on the ASX. 

And just in case you were wondering, all of these stocks have one-year forward yields, including franking, at or higher than Wednesday's print. 

Note: This episode was filmed on Wednesday 26th October 2022. You can watch the video, listen to the podcast, or read an edited transcript below.

Edited Transcript 

Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're joined by two dividend experts for their analysis of five of the highest-yielding stocks on the ASX. To do that, we're joined by Alastair MacLeod from Wheelhouse Partners and Dr Don Hamson from Plato Investment Management. 

First up today, we have dividend behemoth BHP Group. Its share price has fallen around 9% since the beginning of the year. Don, I'm going to start with you. Is it a buy, hold or sell?

BHP Group (ASX: BHP)

Don Hamson (HOLD): Look, it's a hold for us. It's a great quality company. It's good value, but clearly, iron ore prices have come off. They have been held up this year by coal, but I don't see coal prices continuing to grow, but I think they'll stay where they are. So I think it's a hold for us.

Ally Selby: Okay. It has a one-year forward yield, including franking, of 12.2%. Al, over to you. Is it a buy, hold or sell and do you think that's sustainable?

Alastair MacLeod (BUY): I think from an income perspective, it's a buy. When you think back to their dividend policy, which changed significantly in 2016 when they moved from a progressive dividend where they really wanted to grow it every year, but it's a very cyclical business. So that's when they moved to hitch it more to earnings. In a very cyclical industry, if you look forward three or four years, I think the expected dividend moves more towards $2 a share in Aussie, which is still about a 5% yield. So from an income perspective, I think over the next couple of years, I think it's a buy because it's a market-leading position and that yield I think compensates for the cyclicality or the risk to earnings.

South32 (ASX: S32)

Ally Selby: Okay. Next up we have South32. Its share price has fallen around 10% since the beginning of the year. Al, is it a buy, hold or sell?

Alastair MacLeod (SELL): It's a sell for us. I think there's a lot to like about South32, it's got net cash, and it's in the lower half of the cost curve for a lot of the commodities that it operates in. But I think back to a famous US investor called Peter Lynch, he ran one of the Fidelity funds for 25 years and had 30% annual returns in that time. And one of his sayings was that when the PE is low for these deeply cyclical businesses, it's actually time to be selling. And the PE is about seven and a half times. It's contrary to all the other stocks in the market where you'd be looking for a low PE. And I think in this case, because of that cyclicality and risk to earnings, I don't think you're quite as compensated from a dividend perspective as you are with BHP. So with South32, it would be a sell.

Ally Selby: Okay. It has a one-year forward yield, including franking, of 9.8%. Is that sustainable, Don? And is it a buy, hold or sell?

Don Hamson (BUY): For us, it's a buy, but it's pretty marginal. I think it probably will come back a little bit because costs are rising, but we like the commodity mix of it better than BHP. So that's why it rates a little better for us than BHP at the moment.

Harvey Norman (ASX: HVN)

Ally Selby: Okay. Next up, we have Harvey Norman. Its share price dropped around 20% year to date. Don, is it a buy, hold or sell?

Don Hamson (HOLD): Sitting on the fence here, it's a hold. I think if you think we're going to have a recession, it's a sell. We don't think we're going to have a recession, so we have it as a hold because I think that 20% more than reflects the likely fall in sales.

Ally Selby: Okay. It has a one-year forward yield, including franking, of around 11.4%. Is that sustainable, Al? And Is it a buy, hold or sell?

Alastair MacLeod (BUY): Look, for us, I think it's a buy. I acknowledge that there's a lot of risk to the consumer going forward, but I think there's so much froth that's been taken out of the price. I mean, it's down 20% year to date, but really 30% since the COVID-19-induced fever. So at a PE of 10 times ... There's not a lot of earnings growth, and there's certainly not a lot of dividend growth, but longer-term 7.5% or more like 10% fully franked, I think that risk is justified. So for us, it's a buy.

Westpac (ASX: WBC)

Ally Selby: Okay. Next up we have Westpac its share price actually lifted more than 10.5% this year. Al, is it a buy, hold or sell?

Alastair MacLeod (BUY): It's a buy for us. When we look at the market, and we look at the resources space where the expectation is for dividends to decline, the bank space looks like the expectation is dividends will rise. So it's a more favourable sector from that perspective. But, particularly looking at Westpac, their opportunity from a cost-income perspective, it's one of the least profitable banks. They're targeting $8 billion in savings. We don't think they're going to quite get there, but even if they get close, it's providing a lot of earnings growth, which will feed through into EPS growth and dividend growth. So it's a buy for its dividend growth potential from here.

Ally Selby: Okay. It has a one-year forward yield, including franking, of around 7.3%. Don, is it a buy, hold or sell?

Don Hamson (BUY): It's a buy for us too. We see the cycle changing for banks. We've had 10 years of falling interest rates, and net interest margins generally decline when rates decline, and they generally go up when rates go up because banks immediately put up the mortgage rates, and they're slower to put up deposit rates, which is exactly what they're doing now. So we like the banks in general, and for the same sort of reasons, there's cost-out potential there as well. And it had been depressed in terms of its share price, so we like it. It's a buy.

Metcash (ASX: MTS)

Ally Selby: Okay. The last one today is Metcash. Its share price has dropped around 12% year to date. Don, last one for you. Is it a buy, hold or sell?

Don Hamson (BUY): It's a buy for us. Their operations have been very good, whether you look at their retail and wholesale business or even their hardware business. So we think they'll continue to do quite well, so it's a buy for us.

Ally Selby: Okay. It has a one-year forward yield, including franking, of around 7.8%. Is that sustainable, Al? Last one for you, is it a buy, hold or sell?

Alastair MacLeod (BUY): Yeah, it's a buy for us as well. If you look at their business, 60% is in food and liquor. If we do go into a slowdown, they're two places that you want to be in, in terms of their defensiveness. The yield is not as high as Harvey Norman, but it's a much more defensive yield, and if you compare it to the broader market, I think it's 5.5% cash, plus the franking, versus 4.7% on the market. So the risk-reward looks a lot more favourable. It's a real quality defensive with a good yield and a good business, so it's a buy for us as well.

Ally Selby: Okay. Well, that's all we have time for today. I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.

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