The top five dividend stocks on the ASX revealed

The top five dividend stocks on the ASX revealed

June 2019

The top five dividend stocks on the ASX revealed

What is Dividend yield?

Dividends are the method by which company earnings are distributed to the owners of the company (shareholders). The dividend yield provides a measure of what percentage of your invested capital is returned to you in the form of dividends each year. A high dividend yield implies that you are earning more for each dollar of invested capital. Dividend yields on the ASX are currently very high from a historical perspective however one must be careful of just blindly investing in high dividend yielding companies.

With dividend yield calculated as the total dividends paid over the prior 12 months, divided by the current share price, there are two possible reasons for an increasing dividend yield. The first reason is simply that the company has increased the value of dividend payments. This could happen because the company is

" " Dividend yields on the ASX are currently very high from a historical perspective however one must be careful of just blindly investing in high dividend yielding companies.

earning more money or because it decides to pay out a larger percentage of its earnings as dividends. The second reason the dividend yield might rise is if the share price falls. Therein lies the trap with high dividend yielding companies, some of them have high yields because their share prices have fallen precipitously. While this may mean that the stock is cheap it could also mean that the company is in serious trouble from which it won't recover from. The trick with investing in high yielding companies is to weed out the weak ones.

In Australia, dividends can come with attached franking credits, simply meaning that tax has already been paid on the dividends at the company tax rate of 30%. This can mean that the full (gross) value of the dividends is higher than the actual dividend payment by the amount of these franking credits. In calculating the dividend yield, we use the grossed-up dividend amount, meaning that the value of the franking credits is included.

Dogs of the DOW

In 1990 Michael O'Higgins published a book titled "Beating the Dow: A High-Return, Low-Risk Method for Investing in the Dow Jones Industrial Stocks with as Little as $5,000." The book describes an investing strategy, called the Dogs of the DOW, which involves buying the top ten dividend yielding stocks on the Dow Jones Industrial Average index. The stocks are generally held for a year and then the portfolio is rebalanced to update the portfolio to the latest list of top dividend yielding stocks as a result of dividend yields changing over time.

The strategy has actually been back-tested as far back as the 1920's with the long term results showing outperformance against the market as a whole. The idea of the strategy is that blue chip companies generally pay a very consistent level of dividends and therefore the high dividend yield would come about as a result of weak point in the business cycle. As the business cycle returns to the boom phase, the prices of these companies should climb faster than the market as a whole.

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The top five dividend stocks on the ASX revealed

The Dogs of the Dow website publishes data about the strategy as well as historical performance information. The following table shows a summary of return data for the past 15 years.

S trate gy 1 year

Dogs of the Dow

20.1%

Dow Jones Industrials

16.5%

S&P 500

12.0%

3 year

11.2% 8.9% 9.0%

Source: , 09 January 2018.

5 year

15.7% 13.3% 15.1%

10 year

9.5% 8.9% 8.8%

Since 2000

8.6% 6.9% 6.2%

These results show that over the last 15 years the strategy has outperformed both the Dow Jones and S&P 500 by a couple of percentage points. The question is, can this US based strategy be adapted to work on the ASX?

Rivkin's Blue Chip Strategy

Over the years, many variants of the Dogs of the Dow strategy have emerged. For example, the `small Dogs of the Dow' includes just the top five dividend yielding stocks rather than the top ten. Other factors include the frequency of rebalancing and the period over which to calculate the dividend amount.

Rivkin's Blue Chip strategy utilises a variant of the Dogs of the DOW that operates on the ASX 50. Our strategy has performed very well since its inception in 2009, outperforming the market in most years. As with almost any investing strategy, it should not be expected to outperform the market in every single year but rather should outperform over the long term. The following chart shows the compounded annual returns for our strategy over the past 9 years.

Rivkin's Blue Chip Strategy performance*

*Past performance is no guide to future performance.

One feature of the Rivkin strategy is that it aims to reduce the impact of market timing by recommending four separate portfolios spaced one quarter apart. Obviously the precise time at which you start the strategy can significantly affect the final outcome due to lucky/unlucky market timing. By spacing the entry time throughout a one year period, our strategy aims to reduce the impact of market timing on the performance.

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The top five dividend stocks on the ASX revealed

Current Dividend Yielding Stocks

The list of top five dividend yielding stocks can change frequently depending on movement in share prices and therefore the list calculated on any given day can change shortly after. Nevertheless, we have compiled the list of the current top 5 dividend yielding stocks on the ASX 50. For those unaware, the ASX 50 is an index of the largest 50 stocks on the ASX. When I say `largest' this is a slight oversimplification. The index takes into account factors other than just the market capitalisation of the company, such as trading liquidity. Broadly speaking, however, the index can be thought of as the 50 largest companies. The table below shows the current list. It should be noted that the Blue Chip portfolio run by Rivkin does make adjustments to this list so the stocks listed here are not necessarily in our current portfolio.

Source: Bloomberg 3 June 2019

There are few changes since last month although there have been some developments that may affect this list in the future. After many months of being at or near the top of the list, NAB recently announce that it has cut its dividend payment. NAB had been making a bi-annual payment of $0.99 for the last five years but announced that its July payment would be $0.83. This is a 16% cut in the dividend and has come about because the current dividend level is unsustainable. The banking sector has been under considerable pressure recently due to low interest rates and a clampdown on lending standards as a result of the Royal Commission. Wesfarmers (WES), BHP Group (BHP), Rio Tinto (RIO) and Fortescue Metals (FMG) all make the list as a result of the special dividends that these companies paid earlier in the year. Overall, the mining sector has been strong in the recent past as commodity prices have held up well. Furthermore, the weaker Australian dollar has been a positive for these companies as they receive more Australian dollars for a given volume of sales.

The average dividend yield of the top five stocks is now 12.5% (although this is certainly skewed higher by the special dividends) and investors in these stocks can therefore expect a nice stream of dividend payments throughout the year. This is a historically high dividend yield so now may be a good time to start investing in high dividend yielding stocks. Of course, past dividends do not guarantee future dividend payments but with a portfolio of some of the largest companies on the ASX, the risk of dividend cuts is lower than it would be for smaller, less mature companies. Rivkin's Blue Chip strategy holds a portfolio of ten high dividend yielding stocks and therefore represents a more diversified portfolio than the five stocks listed here. The current Rivkin Blue Chip portfolio also holds stocks from the materials and utilities sectors, thus diversifying the sector risk.

Investors choosing to use the Blue Chip strategy should remember that it is intended as a long term investment. The returns may underperform the market in any given short term period and there is no guarantee that future performance will match the historical performance.

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The top five dividend stocks on the ASX revealed

Introducing the Rivkin Local Blue Chip Strategy

month

10

ASX50 stock portfolio

12

holding period before

rebalance

12%

annual average return*

*Past performance is no guide to future returns. Statistics correct as of 5 April 2019

For more information please contact a Dealing and Relationship Manager at: +61 2 8302 3600 info@.au

This guide was last updated January 1 2019. ? 2019 Rivkin Securities Pty Ltd. All rights reserved. Rivkin aims to provide clear and simple information. If any part of this disclaimer does not make sense, please phone Rivkin and ask to speak with a member of our Dealing and Relationship Management Team. Rivkin provides general advice, securities and derivatives dealing services and accounting administration services. Rivkin does not provide advice that takes into account your, or anybody else's, investment objectives, financial situation or needs. We strongly suggest that you consult an independent, licenced financial advisor before acting upon any information contained on this website. Investing in and trading securities (such as shares listed on the ASX) and/or derivatives (such as Contracts for Difference or `CFDs') carry financial risks. CFDs carry with them various additional risks that differ from more simple securities such as fully-paid company shares. Some of these risks include not owning the underlying instrument from which a price is being derived, settling trades `over the counter' with a financial institution rather than on a stock exchange, and using leverage to gain access to trades that may have a higher face value than your initial deposit. This risk of leverage means that it is possible to lose more than your initial investment. Our aim is to create more life choices for our clients, which means improving the wealth of clients throughout many market cycles by nurturing a relationship spanning many years. If you are not comfortable with your understanding of the risks involved before using a Rivkin product and service, please contact our office to seek further information or a Product Disclosure Statement, or make an appointment to sit with one of our friendly financial experts. It is in our interest for your Rivkin experience to be a rewarding and comfortable one. Rivkin is a trading name of Rivkin Securities ABN 87123290602, which holds AFSL No. 332 802.

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