While interest rates have risen from the pandemic induced lows, cash rates and bond yields still remain unattractive for income seeking investors. That said, there are a number of higher income opportunities available in the equity markets via stock dividends.
Now traditionally, Australian equity investors have relied on banks and high yielding industrials for a source of income. However, we at HALO Technologies believe that putting all one’s eggs in one basket (the Australian market) increases overall risk for investors and ignores the myriad of high yielding investment opportunities outside of Australia! Go forth and diversify!
Looking around the world we note that the lowest equity market yields are in Japan and the U.S. The Nikkei (Japan) has a yield of 1.9% and the S&P 500 has just a 1.55% dividend yield, so we may not find too many opportunities there.
However, when we look to Europe and the U.K we see market yields are considerably higher. The Euro Stoxx yields 3.2% and the FTSE 100 has a dividend yield of 3.9%. In fact, when we drill down, we can see a number of European and U.K. stocks that yield in excess of 6-7%.
However, we can’t just choose investments solely on the basis of yield. In some instances, an abnormally high yield brought about by a depressed share price can signal trouble ahead. One should look for companies that have not just a high but a sustainable dividend. Larger companies are preferable than small in this regard, so keep the market capitalisation more than US$1 billion.
Also, only focus on companies with a track record of consistent dividend payments and particularly with the capacity to sustain current dividend payouts into the future. One should also look at certain “quality” factors such as return on equity (ROE), earnings variability, and debt to equity (how leveraged are they).
What yield oriented investors must also understand, the current running yield of any stock is not guaranteed. Companies can and do reduce dividend payments over time. Currency movements may well affect the dividend value when translated into Australian dollars. Therefore, the value of dividends may be higher or lower than the starting yield.
That said, investing in high dividend paying companies has its advantages. Higher income equities may underperform the broad market in strong uptrends but usually do better in corrective phases and downward trending markets like we have now.
In terms of stock ideas, we note that the following two companies look particularly attractive on the basis of yield, underlying fundamentals, and most importantly- the ability to maintain (and perhaps increase) the dividend.
Paris based, Engie SA offers a full range of electricity, gas and associated energy and environment services throughout the world. The Company produces, trades, transports, stores, and distributes natural gas, and offers energy management and climatic and thermal engineering services
Engie is also European and world leader in low-carbon electricity production, centralized and decentralized energy networks, and associated services. The company relies on its key business lines (Renewables, Decentralized infrastructure, Client Solutions, Thermal Generation and Energy Supply) to offer its customers competitive, high value-added solutions that enable them to achieve their carbon-neutrality targets. Engie operates electricity power plants, natural gas terminals, and storage facilities in over 40 countries.