Dogs of the ASX20: why Aussie dividend stocks are no longer a sure thing


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Aussie dividend stocks are no longer a sure bet.

In the past, a dividend-producing stock held for an extended period would match or outperform the market, regardless of the business cycle.

"That's no longer the case," says Uday Cheruvu, portfolio manager of PM Capital's Australian Companies Fund.

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Companies provide sustainable dividends one of two ways.

They either grow the dividend organically through increased sales and margins, or they avoid reinvesting earnings. They don't inject capital, be it through debt or equity.

"The biggest dividend yielding stocks currently need capital injections to grow. So their capacity to pay dividends is constrained at the same time investors most want that dividend - during a poor economic environment."

This view is supported by research from DNR Capital. It analysed the top 10 companies that contribute more than 50% of the ASX200 dividends paid, aptly referred to as the "Dogs of the ASX20".

These stocks would've underperformed the market by about 60 basis points over the last 10 years and around 560 basis points over the last five.

"Whilst the dogs delivered roughly 3% additional income (including franking), this has resulted in roughly 5% lower capital growth," says Scott Kelly, portfolio manager of DNR Capital's Australian equity income strategy.

"The additional income has primarily come from two companies (BHP and RIO) and the special dividends that have been paid in January, April and September."

Banks, previously the dividend darlings of the ASX, have been hit hard by headwinds.

Cheruvu says in order to grow revenue, banks need to either write more loans or grow their non-interest income. Neither is happening.

"Rates are at historic lows and it's harder to grow the loan book, therefore banks need to compete against each other more aggressively," he says.

"All they can do is increase non-interest income, and guess what - banks have sold off life insurance and professional life services businesses."

The banking royal commission has also led to unprecedented regulatory pressure on banks, from fines to increased capital requirements.

For these reasons, Cheruvu has sold out of the major banks, opting to hold cash rather than reinvest in the market.

"The rest of the market remains expensive. The market is chasing a lower number of good stocks, which have more money coming in," he says.

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David Thornton was a journalist at Money from September 2019 to November 2021. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.