COVID-19 forced many listed companies globally to keep hold of their cash rather than return it to shareholders in the form of dividends.

ASX investors in particular would be noticing the absence of extra cash in their pockets because of Australia’s typically high level of dividends paid.

According to Morningstar, the average ASX200 stock has returned 7 per cent annually. Considering total shareholder returns, it has found dividends make up 60 per cent.

But just how long will it be before investors can expect to see those dividends again?

Morningstar said in a client note yesterday that dividends would gradually start reappearing toward the end of the year.

“The dividend tap will flow again as withheld earnings eventually find their way back to shareholders,” it said.

“We expect earnings visibility to gradually increase by the end of this year, while a potential effective treatment for COVID-19 by that time could clear the way for a strong economic rebound.

“We forecast about half of the companies under [Morningstar] coverage will grow dividends in fiscal 2021 from depressed fiscal 2020 levels.”

However it expects the median payout ratio to fall from 71 per cent in 2019 to 60 per cent in 2020.


So who’ll turn on the tap first?

Morningstar reckons the first companies to start paying dividends again will be companies that entered the pandemic in solid shape.

The US-based financial services firm even suggested companies with competitive advantages and capacity to invest would come out stronger.

Morningstar expects funeral parlour operator InvoCare (ASX:IVC), concrete maker Adelaide Brighton (ASX:ABC), record keeping technology provider Link Administration (ASX:LNK) and soft drink maker Coca-Cola Amatil (ASX:CCL). will be the first to again start returning capital to shareholders.

Morningstar noted these companies were trading at a discount to fair value estimates and had economic moats and medium-to-low uncertainty.

However, the financial services firm warned investors who may have only considered dividends in stock picking to also consider valuations and competitive advantages of the companies they choose to back.

And once the crisis has passed, it expects a solid few years of dividend paying ahead.

“We expect companies in our coverage to grow dividends at a 3.7 per cent average yearly pace over the next five years,” Morningstar said.