We previously looked at Cochlear and Woolworths as 2 of Australia’s best potential dividend stocks. What are the others that make the cut?
Telstra (ASX: TLS)
Any considered analysis of the best dividend stocks in Australia has to at least give a passing mention to Telstra in my view. The incumbent telephony provider has been hit with a wave of uncertainty surround the role it will play in any NBN (National Broadband Network) rollout. This uncertainty has adversely affected its stock price for much of 2011-2012.
While some of Telstra’s traditional core businesses such as its Fixed Line telephony service and even its Yellow Pages business are in major decline, it future growth prospects are pinned to the rise in mobile telephony (specifically smartphones). Telstra has a few things going for it here. Its substantial investments in its network (particularly in its 4G) network have given it almost a 12 month advantage over rivals Optus and Vodafone as far as its 4G rollout is concerned. More significantly however the emphasis on network quality and reliability is literally “paying dividends” as Vodafone goes from one blunder to the next, arising from its failure to properly plan and invest in a robust network.
Telstra stands to reap billions as the NBN gets rolled out as the government pays it to shutter its copper network. While smartphone usage is reaching a point of saturation, there is likely good growth for the next several years as more and more people continue to upgrade to smartphones.
Telstra’s dividend history? Telstra has a patchy record of dividend increases, in fact Telstra’s dividend hasn’t moved at all in the last 5 years. There’s good reason for that though. Telstra’s dividend payout ratio has topped 90% in the recent past with limited ability to go higher. While I’m generally opposed to stocks that have no record of dividend history, I’m also of the view that you need a couple of large, stable dividend payers to anchor your portfolio.
Telstra’s dividend was too tempting for me to pass up 18 months or so ago when it was trading at around $2.70 and yielding close to 10.5% before any franking credits (it actually dropped lower than $2.70 also!). Telstra’s dividend is secure as I can see, and in fact will likely grow as the NBN kicks in. I’m content to keep holding this one, but don’t know that i’d be buying in at todays prices (~$4.30).
Commonwealth Bank (ASX: CBA)
The “big 4″ banks in Australia generally cop a bashing from the public due to perceptions of cartel like behavior. Uniform increases and decreases in interest rates are typical with one “designated bad cop” to take the lead. For years as Australians geared up to buy a property like there was no tomorrow, the Australian banks made hay while the sun shone, with returns on equity in the high teens, and generous dividend increases in the order of 10-12% a year.
The hey days of the early 2000′s are now behind them as they adjust to a life of new normal. With Australian’s debt to disposable income levels at ridiculous highs by international standards, banks are frankly a little exposed if the Australian economy takes a turn for the worst. Fortunately that doesn’t appear likely to happen in my view. However if mortgage lending is at record lows and Australians are paying down debt as fast as they had taken it on previously, then where’s the growth?
In my view the hidden jewel that the big 4 Australian banks have in their crown is their exposure to the superannuation assets of 20m+ Australians. Compulsory superannuation is the norm in Australia. For my American friends, this is essentially equivalent to the 401k contributions that are required to be paid by an employer, and the current limit is 9% (although there are proposals to have this increased further).
As this money grows, compounds and receives further inflows, it becomes a big pot, a big pot with a lot of management fees attached to it. Who controls the majority of superannuation flows in Australia? After a spate of wealth management mergers (CBA, Count Financial, NAB MLC etc) its really the big 4 banks and AMP. Managing superannuation is a scale game (you have to be big to get the cost efficiencies), which is why any remaining smaller guys (like IOOF) should get acquired over the next year or so. My bet on the banks is that they will reap a bunch of trailing fees from the management of this money over the long term.
Which bank do I like the best? All of them really, though I’d probably be most comfortable with CBA from a prudential standpont. ANZ has some good exposure to Asia. If you believe the Asian growth story there will be more people looking to additional finance to purchase consumer goods as disposable incomes rise. The one potential cloud could be some of the Cooper review changes and what they mean for management fees for superannuation, though everything I have seen suggests impacts are likely to be minimal on the larger managers (like the banks) and more pronounced on the smaller guys.
CBA’s has had a consistent history of raising dividends over an extended period of time. In 2000, CBA was paying out approximately $1.30 in dividends. That has since risen to a level close to $3.50 per share. Almost 10% p.a compounded over more than a decade.
CBA, like the other dividend stocks mentioned, has experienced a nice surge in stock price over the course of the year, rising from $47 to almost $62. While the stock is comfortably yielding close to 5.5%, I’d be in no great hurry to pick it up at these prices.