An Australian-based fund manager has cautioned investors looking for yield from their equity portfolio allocations not to chase companies offering high dividend distributions from their shares exclusively as they may not be sustainable in the long term.
“Very high-yielding stocks may not be investing in future dividend growth and so while they pay out larger amounts, their future income streams may be coming from a declining business,” Ausbil Active Dividend Income Fund portfolio manager Michael Price noted.
Price pointed out some companies currently paying low yields may also be offering significant dividend growth, but advised individuals against trying to identify such stocks by sector as the approach is neither straightforward nor easy.
“Some sectors like software and pharmaceuticals and biotechnology are offering higher dividend growth, but a very low yield,” he noted.
“Gold, by contrast, while offering a low yield is also looking at dividend contraction in 2024 based on consensus numbers. Of course, this changes dynamically, and across the cycle.
“For this reason, it is difficult to settle on an individual sector or stock that can deliver both high yield and high growth across time.”
With regard to the general yield landscape, he said the dividend outlook for large-cap Australian companies is positive for the 2024 financial year.
“The consensus outlook for dividend yield for financial year 2023 is currently around 4.4 per cent (S&P/ASX 200) and for financial year 2024 around 4.4 per cent again,” he revealed.
He acknowledged these forecast returns are consistent with historic long-term dividends generated from the Australian Securities Exchange, around 4.5 per cent on average, and added the income delivered, as well as other benefits, will be stronger when franking credits are taken into account.
“When adjusted for franking credits (remembering that a dollar of franking credit is worth the same as a dollar of cash dividend to all Australian taxpayers), the gross dividend yield rises to around 6 per cent a year,” he said.
“The difference here is the benefit franking credits offer over and above the dividend yield and the potential for long-term portfolio growth in shares to provide some protection for the impact of inflation.”
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