Top Five Dividend Stocks for 2020

[Pages:22]Five Dividend Stocks Set to Thrive in 2021

Five Dividend Stocks

Set to Thrive in 2021

By Greg Canavan, Editor

`D o you know the only thing that gives me pleasure? It's to see my dividends coming in.'

John D Rockefeller `T he importance of dividends for providing wealth to investors is self-evident. Dividends not only dwarf inflation, growth, and changing valuations levels individually, but they also dwarf the combined importance of inflation, growth, and changing valuation levels.'

Robert Arnott Do dividends matter? Robert Arnott, respected investor and chairman of Research Affiliates, which advises on more than $195 billion in investment assets, answered `you bet'. Writing for the Financial Analyst Journal in 2003,Arnott argued that unless corporate managers can oversee sharply higher real earnings growth, dividends remain the `main source of the real return we expect from stocks.'

Source: Robert Arnott

Greg Canavan

Greg Canavan isthe Editorial Director of Port Phillip Publishing and Fat Tail Media, and Editor of theGreg Canavan's Investment Advisoryinvestment newsletter.

Over the years, Greg has developed a unique investment philosophy that embraces the value of ignorance. He believes that most people get into trouble in the markets by succumbing to their biases or holding on to their views despite being wrong.

He believes the best way to deal with this is to admit that you really know very little. Therefore, investors need to put their ego aside and listen to what the market is truly saying.

Greg does this through evaluating stocks based on fundamental factors AND charting analysis. The charts contain a wealth of information if you know how to read them properly, and are a great way to crosscheck your opinions based on fundamental analysis.

For more information about his work, you can check out his paid services:

? Greg Canavan's Investment Advisory

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Compiling data over 200 years for US stocks,Arnott's number crunching indicated that the importance of dividends for providing wealth to investors is `self-evident'. As Arnott found and the above chart shows, dividends dwarfed the combined importance of inflation, growth, and changing valuation levels. While the analysis is somewhat dated, it doesn't detract from the overall message gleaned from more than two centuries of data. And in a low cash rate environment, dividend stocks can matter even more. CommSec Chief Economist Craig James noted in March 2021 that dividends have taken on greater importance, especially as new investors enter the market in response to low inflation and near-zero rates. Mr James also noted that:

`A ustralian companies have to compete with residential property markets and international shares to secure the affection of investors, and with share prices often constrained by a range of macro influences, that puts more onus on companies to offer attractive dividends or to support share prices with buy backs.' We'll delve more into record low rates later. Given the self-evident importance of dividends, investors will likely wish to know if Australian corporate managers care about distributing them. I have good news. In March 2021, Commonwealth Bank released a report showing that almost 80% of ASX 200 companies issued a dividend during the February reporting season, totalling nearly $26 billion. This was up from $21.6 billion recorded in the August 2020 reporting season but still down from the $27.5 billion in the February 2020 reporting season.

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Source: CommSec

Why select dividend stocks?

The Financial Times Guide to Investing for Income book has a chapter on the attraction of investing in dividend stocks. In it, the authors cited evidence that a strategy of buying the `right kind of dividend payers (progressive dividend payers with a decent balance sheet) will actually delivers [sic] better returns in and of itself.' The authors mention that the market itself `tends to prioritise the attractions of certain dividend payers and awards their shares a premium rating.' The reason? Dividends are `easy to calculate and involve simple, hard numbers made in regular payments.' Additionally, the authors pointed to research from French bank SocGen that found dividends were less volatile than earnings, a steadiness valued by the market. SocGen's team of analysts looked at the volatility of both earnings growth and dividend growth.They found earnings were much more volatile, with earnings growth oscillating between ?35% and +40%, against dividend growth which has stayed in the range of ?7% to +19%. Overall, SocGen's team estimated that annual earnings growth has been 2.5 times more volatile than dividend growth.

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The book's authors also highlighted research from Credit Suisse, which suggested that much of the premium associated with share investing stems from companies paying out a dividend. Echoing Arnott, this research found that high-yielding stocks amongst the top 100 companies between 1990 and 2008 would offer average annual returns of 10.8% compared to 9.2% for the market and 7.7% for low-yielding stocks.

Source: Financial Times Guide to Investing for Income

Another reason some investors prefer dividend stocks is by looking at what companies who don't pay dividends do with the retained earnings. As legendary investor Peter Lynch noted in his One Up on Wall Street classic, stocks that don't issue dividends `have a sorry history of blowing up the money on a string of stupid diworseifications.' Lynch referred to Hugh Liedtke's bladder theory of corporate finance in making that argument: the more cash that builds up in the treasury, the greater the pressure to piss it away.

Dividend traps

Beware the stock enticing you with a deceptively high yield. While we'd like our dividend stocks to yield enough return to warrant the name, we must never end our research simply at what stocks have the highest yields. That can lead to traps.

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Take Scentre Group. In 2020, it was trading on a historical yield of 10% -- seemingly a handsome return -- before it announced it wouldn't be paying its August 2020 distribution. A high yield can also tell you the market doesn't believe the company's earnings are sustainable.A yield that is way above average is often a warning sign, not an attraction. What would you do if rates went to zero?

Source: ASX

Or, worse yet, what would you do if rates went negative? Up until recently, that question wasn't even on investors' minds. However, with a string of rate cuts taking the cash rate to a paltry 0.25%, negative rates could be something we all have to grapple with in the future. It almost seems impossible to comprehend -- fancy paying your bank interest just to deposit your funds. Or earning interest when you take out a loan. The concept flips the whole idea of money on its head. Interest rates are supposed to be the barometer for risk.The higher the risk, the higher rate a lender will charge. If negative rates ever do come to fruition, this basic premise of finance flies out the window. The real question is, though:What would you do if rates did go to zero? If that were the case, how would you invest your funds to generate sufficient income to live, let alone pay the bills? One thing looks certain, power bills and other expenses aren't heading down.With wages barely tracking inflation and costs rising, households are becoming ever more squeezed as they strive to make ends meet.

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It also means that those who might have invested in cash products, like term deposits, will likely need to find other asset classes to invest their money.That could mean putting more money into shares than they might wish to.

Returns on cash-like products, term deposits and government bonds falling below 1% mean the real rate of return of these previously `safe' investments has already fallen into negative territory when accounting for inflation.

Nevertheless, as Plato Investment Management Managing Director Don Hamson pointed out when it comes to share dividends, he still expects `yield to significantly exceed income from other asset classes and inflation.'

If you look at many of the brokers' income portfolios, they will likely include the same old stocks, including banks.While banks have been steady and reliable dividend payers for years, in April 2020, the Australian Prudential Regulation Authority (APRA) directed banks to `seriously consider' suspending dividend payments as a precautionary measure at the height of Australia's struggle with COVID.

APRA's April ruling also capped banks' shareholder payouts at 50% of profits.

And while Australia has primarily suppressed the virus in 2021 alongside APRA lifting its payout cap, financial risks associated with COVID aren't the only factor to consider with banks.

Banks, too, are victims of low interest rates. For them, it makes it more difficult to maintain their net interest margins.

Plus, while APRA scrapped its 50% cap, it still states in a December 2020 guidance that it `expects banks and insurers to continue to moderate dividend payout ratios.'

APRA stressed that banks should exercise `caution in capital distributions, with an ongoing measured approach to dividends in this heightened risk environment.'

This advised caution could cap the growth potential of bank dividends for the foreseeable future.

But don't get me wrong. I'm not saying you shouldn't own some of these old income favourites.These mega-cap stocks will still likely play a part for many income investors.

What you also need to consider, however, is the other dividend-paying stocks out there. There are hundreds of additional dividend-paying stocks on the ASX to choose from.

And with the massive and still-unfolding impact of the coronavirus, many are trading at attractive long-term value.

Today, I'd like to show you some dividend stock ideas for 2021 that are not on everyone's radar, and not one of them is a bank.

Of course, these are just ideas I am giving you.

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It is up to you to research them and see if they suit your personal needs. If in any doubt, please be sure to speak to a financial advisor who can help decide if these stocks are for you. Even if you don't think any of these stocks fit your needs, I hope this report at least sparks an interest in you to research some other dividend payers on the market. So please keep reading for what I consider to be among the five best dividend-paying stocks on the ASX...

Dividend stock # 1 Suncorp -- it pays to be insured

Suncorp Group Ltd [ASX:SUN] is a financial services provider in Australia and New Zealand that delivers insurance, banking, and wealth services. It is a large conglomerate employing more than 12,500 people, with a market capitalisation of around $13.9 billion. Equity analysis should first begin with business analysis.And to analyse Suncorp's business, one must understand its three core segments. They are Insurance (Australia), Banking and Wealth, and Suncorp New Zealand. Suncorp's Insurance (Australia) arm is one of Australia's largest general insurers by Gross Written Premium (GWP). Its products range from home and contents, motor, caravan, compulsory third party (CTP), worker's compensation, commercial, and health and travel insurance. Suncorp Bank focuses on lending, deposit gathering, and transaction account services to personal, small and medium enterprise, commercial and even agribusiness customers. Suncorp New Zealand delivers financial services via general and life insurance brands and partnerships. Suncorp Group's network of brands includes names like AAMI, GIO, Bingle, and Apia. The company also recently initiated a three-year plan to consolidate its core offerings by furthering digitisation and automation to generate more sustainable, cost-effective returns.

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