Research has shown that dividends deliver a significant portion of long-term performance in equities investments. Dividends can also offer tax effective returns through dividend franking credits, especially when the franking credits are delivered to a super fund. Today we’re going to scan the ASX for some dividend-paying stocks to help you ramp up your portfolio’s performance.
The goal of the dividend growth investor is to build a portfolio with steadily increasing income, which is seeking to outperform the market via equity growth through increasing earnings and capital gains.
Last year the dividend-paying stocks underperformed the overall market, as is clearly illustrated if you pull up any property trust charts. This underperformance is due to investor concern over the effects of the GFC when dividend-paying stocks were hit hard, with companies reducing or even cutting their dividends in order to preserve capital in the tight money market conditions that prevailed at that time.
In our recent Quarterly Performance Reviews we identified that investor portfolios could have performed in line with the index even if investors confined themselves to the ASX Top 20. We also noted that the broader market indices significantly underperformed the Small and Mid-Cap resource stocks last year.
This year we may well see some market rotation as investors take profits from their resource stocks and allocate some of these funds into dividend-paying stocks which have been underperforming.
Since many stocks will be going ex-dividend by the end of this month and the local earnings reporting season began this week, we thought it timely to look for some stocks set ramp up due to their yields.
Identifying Dividend-Paying Stocks
We ran a couple of scans using the Standard and Poors (S&P) ASX leading stock indices as our primary filter.
In the first scan we searched the S&P ASX50 for stocks with substantial yield and the potential to offer capital growth as their earnings improve.
Table 1: S&P ASX50 Stocks Filtered for Dividend and Growth
This list gives us stocks in the Top 50 that are paying dividends above the current RBA cash rate, with reasonable gearing, and that have potential for increasing earnings growth as the year progresses.
If we ignore stocks that have a weak return on equity or had negative earnings last year, this shortlist can be trimmed further to: Telstra, QBE Insurance, Westfield, NAB, Westpac, AMP, CBA, ANZ, GPT, Leighton and CNA (in order of dividend yield).
In the second scan we narrowed the search to the S&P ASX20 in light of what we observed in the Quarterly Performance Reviews. With stocks in the S&P ASX20 investors also have the opportunity to write covered calls over their stock to boost their performance even further.
Table 2: S&P ASX20 Stocks Filtered for Dividend and Growth
Again this list gives us stocks in the Top 20 that are paying dividends above the current RBA cash rate, have a solid return on equity and have potential for increasing earnings growth as the year progress.
If we ignore stocks that have above average gearing or had negative earnings last year, this shortlist can be trimmed further to ANZ, CBA, NAB, Telstra, Westpac and Westfield.
As part of the service Trader Dealer provides on this blog we monitor upcoming dividends and list the details of dividend payments as they are announced.
The Bourse Software Screening Tool
If you use The Bourse software you can screen shares via the Bourse Research tool. When you open The Bourse, go to the Bourse Links menu, select Bourse Research and then click the Screening Tool link.
The Screening Tool can make the stockmarket fundamentals scan a simple task, by allowing you to quickly scan the market for your specified selection criteria. You can save the query for easy access when you next need to scan.
Today we have suggested a shortlist of stocks that you may want to consider if you are looking to ramp up your portfolio performance through dividend-paying stocks.
The MDS Financial Research service monitors the market daily and highlights stocks such as these dividend payers when they are ready to run. Sign-up for a 14-day trial today.
By Michael Hevern
Head of Research