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Income Investing

Stock choice important in dividend revival

July 2021
Max Cappetta
Chief Executive Officer & ​Senior Portfolio Manager
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Investors seeking income may find some stock dividends will return this year, but they should still be prepared to take an active position with their choice of stocks and look beyond those that have previously paid a high dividend, a fund manager has said.

This article was first published in smstrusteenews (smstrusteenews.com.au) on 30th July 2021 by Jason Spits.

Stock choice important in dividend revival

Investors seeking income may find some stock dividends will return this year, but they should still be prepared to take an active position with their choice of stocks and look beyond those that have previously paid a high dividend, a fund manager has said.

According to Redpoint Investment Management chief executive and Australia equities portfolio manager Max Cappetta, while there was consistency and cyclicality in when dividends are paid over a calendar year, investors also needed to understand what sectors are profitable.

“The consistency of dividend payments highlights that there are a range of opportunities for capturing additional income if you take a more active trading approach,” Cappetta said.

He noted profitability cycled through different industries and sectors through time, pointing to resurgent payments from the mining sector and the recent fall in bank dividends as indicators investors should look broadly across the market instead of focusing on the high dividend yield stocks of the past.

While banks stocks are expected to return dividends this year, they would not return to pre-COVID-19 levels until at least 2023, he forecast.

“We have seen some bounce back already in 2021 for bank dividends thanks to better-than-expected earnings and debt provisioning, but of course the lockdowns that we are all involved in again are a cause for concern,” he said.

“One item that we’ve also noticed over a very long period of time has been a lack of product innovation from the banks.

“We are looking for the way in which banks are going to spend the proceeds of their exit from the wealth industry in ways that they can actually support client engagement, support retention and then fight off competition from emerging fintechs, so they can regain some earnings growth and therefore dividend growth in the future.”

He said strong dividends were expected from iron ore miners, as well as those seeking copper and lithium, which is used in clean energy projects, as well as from the retail sector where supermarkets and technology and appliance retailers had benefited from people working from home.

Cappetta added emerging companies in the information technology sector also offered strong potential dividends and while yields there were low, “the discipline of actually paying dividends for us is a good indicator there are strong underlying fundamentals to these companies”.

“For many investors, particularly retirees with interest rates at essentially zero, dividends are definitely on the comeback,” he said.

“In our research and analysis, to capture income from Australian equities more consistently over time, investors need to consider the calendar and the industry profit cycle and then look at dividend opportunities beyond a common approach on focusing on recent high dividend-paying stocks.

“Once you do have this broader investment universe to search for income opportunities that opens up a range of stock selection ideas that enables people to actually capture a greater and more consistent income [source] and also add some value through time.”

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