Is dividend drought near an ending?

Sharemarkets are on a high, but that’s of little comfort to income investors battling through another year of disappointing payouts. And the pain’s not over yet: while stocks push upward, dividends are headed even lower.

This is the last thing income investors need. Dividend growth for the top 200 companies was non-existent in 2024, meaning investors went backwards in real terms. That’s after an even worse 2023, when dividends dropped 10 per cent.

There’s no relief just yet, with Morningstar now tipping an overall decline of about 5 per cent on dividends for the 2025 fiscal year. Just two months ago the research house was estimating dividends would be flat next year. So what changed?

As is clear from the chart below, there’s one clear culprit: the under-pressure materials sector, which will see a 21 per cent drop in payouts next year, Morningstar estimates.

While this sector accounted for about 30 per cent of overall dividends in the past year, that falls to 25 per cent of overall dividends in 2025. That 5 per cent drop is a big hit to the final tally.

“They’re incredibly cyclical industries and their earnings fluctuate directly with the price of the commodities they sell,” Morningstar market strategist Lochlan Halloway says.

“They have no control over (their prices), so they have very little control over what they earn, and therefore very little control over what they pay out. For the most part, their dividend cycle reflects the commodity price.”

Best dividend chances

Anyone hoping the major banks will make up the shortfall will be disappointed. Financials
will see dividend growth of just 1 per cent next year, as earnings come under pressure.

Healthcare, industrials and technology are all expected to lift payouts in 2025, but each makes up only a small proportion of the market.

Giving income investors a glimmer of hope, the picture improves in 2026, with overall dividend growth to hit about 4 per cent. All sectors bar energy are expected to lift payouts, Morningstar says. For the miners, the estimate is for a 2 per cent dividend lift in 2026; for financials it’s 7 per cent.

“We think the big winners will be the cyclical sectors – consumer, industrials and financials – which should benefit from an upturn in economic activity as inflation cools and central banks ease monetary policy,” Halloway says.

Don Hamson of Plato Investment Management, whose strategy includes buying stocks to get dividends before selling and moving on to the next trade, suggests we won’t see any relief from the dividend drought until the economy improves.

“We’d certainly like dividends to increase, but for dividends to increase, earnings need to increase and for that to happen we need to see the economy being stronger,” Hamson told The Australian’s Money Puzzle podcast last month.

“Hopefully we will see rates falling fairly soon, and hopefully the economy will start to get back to a normal pace of growth and companies can expand their earnings.”

But with Donald Trump winning the US election, there are now fears of a fresh round of global inflation if he follows through with his tariff threats. The president-elect has said he wants to put tariffs of 10 per cent on all goods imported into the US, with tariffs on Chinese goods to be even higher, at 60 per cent.

Banks v gold

Australia’s major banking bosses, including NAB chief executive Andrew Irvine, last week shrugged off suggestions that such moves by Trump would delay the first RBA rate cut, expected in early 2025. But there are concerns, including from banking chiefs, that future rate cuts, into late next year and beyond, may be delayed if Trump goes ahead with his tax and tariff plans.

This could all weigh on earnings of local companies in the year ahead.

As Hamson says, “it’s pretty tough out there”, with banks and commodities all underwhelming on the dividend front.

But gold stocks are a standout, he says. “Gold prices have held up very well and we saw some very large increases in dividend payments, albeit from low levels, in gold stocks,” Hamson notes.

Along with gold stocks, Hamson likes utilities but says insurers are probably coming to the end of the cycle after a couple of good years of payouts.

Dividend stars

Over at Morningstar, some of the winners Halloway sees as escaping the dividend drought for 2025 include APA, Aurizon, Endeavour, Domino’s and TPG Telecom.

The dividend yield is expected to be between 4 per cent and 8 per cent for these names. Just one – Endeavour –
will be paying out fully franked dividends for investors. The rest will have franking anywhere from 8 per cent to 60 per cent.

Australian investors, and retirees in particular, know all too well the value of franking credits. Between 2011 and 2022, franking credits added about 2 per cent to annual ASX 200 returns, for 22 per cent of total returns in the period, according to Morningstar.

With the dividend outlook improving after next year, all sectors bar one are expected to deliver higher payouts in 2026.

The laggard, as Morningstar sees it, will be the energy sector, which is set to reduce dividends by 23 per cent. That’s after a 12 per cent fall this year and a further 3 per cent decline tipped for 2025.

This article first appeared in the Weekend Wealth section of The Weekend Australian.