While share price increases offer the best potential for returns, some stocks will also pay dividends and many will announce them in the weeks to come (if they haven’t already).

The ASX is currently amidst reporting season with companies required to lodge full year results (or half year if they utilise the calendar year) by August 31.

Unlike quarterlies, they are more evenly spread across the month with the date often being pencilled in at the start of the year.

While Australian companies are not the only ones that pay dividends, Australia is unique for its dividend-friendly policies including franking credits and the dividend imputation system.

This creates a supportive regulatory environment for companies to return more capital to shareholders by dividends, rather than acquire other companies, reinvest in the business or undertake buybacks.

Research from Morningstar indicates dividends and franking credits have made up 70% of the ASX200’s return over the past decade.

 

How to find a stock that might pay dividends

Obviously, companies with a reputation for paying dividends and companies that are profitable are more likely to be popular than those that don’t or are not.

But a Morningstar report shared with Stockhead has recommended investors look at several specific metrics. Among them:

  • A company’s economic moat, measuring its ability to protect itself from competition
  • Organic revenue growth
  • Degree of customer concentration – a high level, meaning it derives the majority of its revenue from a small number of customers, could be a threat.
  • Recurring revenue
  • Resilient profit margins
  • Sustainable dividend payout ratios – in this instance Morningstar says anything above 90% might not be

 

ASX dividend stock ideas

In this context, Morningstar picked 10 “Franked Income Stock Ideas” for Australian investors.

In considering the allocation, it disregarded companies with no economic moat, a poor capital allocation as well as New Zealand companies.
Aurizon (ASX:AZJ) – The coal company has, like its peers, been affected by China trade tensions and rumours of coal’s demise as the world decarbonise. But it literally said the talks were “exaggerated, at least in the foreseeable future”.

“Almost all Australian thermal coal exports head to Asia, where plans for new coal power stations underpin demand growth,” it said.

“Metallurgical coal is necessary for steel making, with demand growth driven by ongoing economic development in Asia and India. Further, coal prices have shot higher in recent months, which is good for Aurizon’s customers and suggests haulage volumes will improve shortly.”

It also noted Aurizon was trading at $3.88 which is a 20% discount to its fair value estimate of $4.70.

 

Perpetual (ASX:PPT) – It’s been a turbulant time in the investment services space but Morningstar thinks its recent acquisitions of US fund managers Barrow Hanley and Trillium will improve the earnings outlook.

“Unlike the investments business, we think both the private wealth and corporate trust segments can better withstand the threat of competition and can generate more predictable earnings growth,” it said.

 

Link Administration Holdings (ASX:LNK) – While this business has been impacted by investor concerns about superannuation regulation reforms, Morningstar thinks investors are being too short-term focused.

“Around 70% of group revenue is recurring and should help ensure the company survives the COVID-19-related economic downturn,” it said.

Link also owns 44% of electronic conveyancing platform Pexa (ASX:PXA), which has a first-mover advantage and looks likely to build a network effect in the large Australian real estate conveyancing market.
Westpac (ASX:WBC) – Australian banks have a good reputation for paying dividends but some cut theirs amidst COVID-19. Morningstar reckons it can rebound.

“We think Westpac can comfortably lift the dividend payout ratio to 75% after being forced to cut it to 50% in 2020, with the bank sitting on around AUD 8 billion in equity above regulatory requirements,” it said.

“As it is the second-largest lender in Australia, we remain confident the funding cost advantages Westpac enjoys will see it through the turbulence and underpin a return to strong profits and returns on equity.”
APA Group (ASX:APA) – Although APA was roughly in line with its fair value estimate it was still a good quality company primed to benefit from the transition to renewable energy.

“We expect ongoing investment in wind and solar farms while its core gas transmission networks benefit from growing gas use to backup intermittent renewable power supply,” it said.

 

Magellan Financial Group (ASX:MFG) – Magellan is another asset manager that has seen some turbulence during COVID-19 like Perpetual. Again, Morningstar is tipping a rebound.

“Concerns about Magellan’s temporary underperformance are overblown, in our view; while performance may lag further in the short term, this reflects the rerating of cyclical/deep value stocks, which should normalise,” it said.

 

Medibank (ASX:MPL) – Medibank was a not for profit health insurer before being privatised and ASX listed in 2014 and is Australia’s largest private health insurer.

The company tips it to benefit from increased spending on healthcare as the population ages.

“Australian health insurers typically produce stable and defensive earnings and, in our opinion, Medibank is well placed to produce solid long-term earnings growth,” it said.

“Future changes to regulations could hurt Medibank’s prospects, but we don’t believe the government would materially damage the viability of the private health insurance sector in Australia.”

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