‘Changing of the guard’ among sustainable dividend earners

Dividend lovers: we’re witnessing a bit of a changing of the guard when it comes to the performance of ASX listed companies.  Financials and in particular banks – where investors have traditionally looked for their sustainable dividend growth – are beginning to be threatened for the mantle of sustainable dividend earners by so-called cyclical stocks 

Within the cyclical category, resources stocks are beginning to show signs of dividend growth, while financials’ dividend growth is beginning to look static. There has been a changing of the guard. 

This has been the best reporting seasons since 2010 when measured by the ratio of positive earnings revisions to negative earnings revisions. The local share market also saw strong dividend growth of 3.5 per cent over the prior results in 2017. 

However, what’s a little different is that distribution growth is coming from a different part of the market. Previously, financials have been leading dividend growth. Financials are now holding their dividends and we’re seeing a number of cyclical sectors, namely energy and resources, increasing their dividends.

The following chart compares dividend yield growth of financials and resources segments on the ASX and shows the dividend yield of the resources basket creeping up, reflecting dividend growth coming through in this segment.

This trend is stronger than perhaps the above chart suggests, considering bank shares have risen steadily as their dividends have grown in recent years.

Shares in resources companies have been rising in recent months as investors begin to focus on names within this segment but the dividend growth within this segment is still apparent.

Looking at share price and dividend growth of resources companies side by side (chart below) it’s clear dividend growth in this segment is going up in unison with valuations. 

Overall, the most recent earnings season was a bit of a pivotal time for investors, Coming to the end of a multi-year bull market, valuations are at multi year highs and we now are now about to start seeing interest rates tighten overseas. 

Higher interest rates coming down the pipe could mean higher costs of funding, which could begin to challenge business models. At the same time, we are starting to see signs of economic growth, which could be a positive other businesses positioned to take advantage of emerging growth opportunities.

At the moment the market really likes growth stocks, but in that space we’ve seen growth stocks as expensive as they’ve been for over a decade. If you are expensive, you’ve got to deliver and that was something we saw this earnings season, Investors seeking income producing stocks should be looking for sustainable dividend producers.

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