Criterion: Don’t horse around with the Magnificent Seven dividend stocks this reporting season

• Dwindling yields from the dividend favourites mean investors should saddle up elsewhere
• Led by the CBA, the ‘Magnificent Seven’ account for half of all dividends paid
• Investors should avoid swapping growth thoroughbreds for high-yielding donkeys that won’t last the distance

On the cusp of the August profit reporting season, dividend yield chasers are mulling the top stocks likely to impress with their payouts.

This year, they will need to look harder. Combined with elevated share valuations, subdued earnings are likely to diminish the appeal of the dividend faves.

Historically, Australian investors have not looked too far in their quest for income. Of the ASX200 stocks, a mere seven account for half of all ASX dividends in 2024.

For the record, they are the Big Four banks, BHP (ASX:BHP), Fortescue (ASX:FMG) and Woodside Energy Group (ASX:WDS).

(This Magnificent Seven shouldn’t be confused with the top US tech stocks which share the same nomenclature).

The top dividend payer, the Commonwealth Bank (ASX:CBA) yields a sub-par 2.5% after its monstrous share run.

The top 100 stocks account for 97% of the ASX200 index dividends.

The average pre-tax yield has fallen to 3.2%.

This compares to the historic run rate of 4.5% over the last ten years and 4-6% over the last five decades.

“Airbag” protection

The manager of Ausbil’s active dividend income fund, Michael Price cautions that chasing dividends should not come at the cost of losing capital.

With that in mind, the fund positions itself to capture the best dividends from events such as the upcoming reporting season, “rather than passively buying and holding for a long time”.

Atlas Funds Management’s Hugh Dive counsels investors to pay close attention to capex requirements: companies needing to replace or upgrade assets won’t be going on a dividend spree.

Companies exposed to the US are likely to be preserving funds, given the ‘what will Donald do next?’ uncertainties.

But Dive says dividend-paying stocks provide “airbag” protection in a downturn: when yields become high enough, investors will jump back in.

Don’t bank on the banks

Price says of the banks: “I don’t see much dividend growth coming over the next two or three years.”

That said, the CBA remains the fund’s biggest holding, as it’s the next Big Four bank to pay a dividend (the others have a September 30 balance date).

Ausbil’s preferred Big Four bank is the runt of the litter, the Australia and New Zealand Banking Group (ASX:ANZ).

But Price believes there’s better value in Macquarie Group (ASX:MQG), which pays a lower div than the Big Four but makes up for this with its superior growth potential.

“It’s always hard to know exactly where Macquarie will make its money, but it is a well-run business that benefits from volatility,” he says.

Insurers offer premium yields

Price says domestic insurers such as Suncorp Group (ASX:SUN) and Insurance Australia (ASX:IAG)  continue to post strong premium growth whilst managing claims pressure.

The same applies to the listed health insurer Medibank Private (ASX:MPL) and NIB Holdings (ASX:NHF).

Ausbil has also got back on the old dividend warhorse Telstra (ASX:TLS), given more rational competition in the mobile sector.

Price cites the “quality end” of discretionary retailing: stocks such as JB HiFi (ASX:JBH), or the nation’s biggest car yard, AP Eagers.

But for the first time in years, Ausbil won’t be riding into the reporting season with dividend faithfuls Woolworths (ASX:WOW) and Coles Group (ASX:COL).

These grocers have been stabled because of competitive pressure (read Aldi), regulatory scrutiny over profit gouging claims, management upheaval and elevated capital spending.

Sonic booms on pathology demand

Atlas’s Dive nominates Sonic Healthcare (ASX:SHL) , the world’s biggest pathology provider trading on an approximate 4.5% yield.

Sonic benefits from an older population and one of the few companies genuinely likely to benefit from AI.

Unlike other health companies, pathology providers don’t have to spend a poultice on R&D.

At the smaller end, Plato Investment Management’s Peter Gardner likes Ventia Services (ASX:VNT), which manages infrastructure and public assets.

In December the competition regulator took the company to task over defence contracts, but the company seems to have weathered the storm.

Ventia yields round 5%.

Digging up dividend delights

Despite their earnings being subject to volatile commodity prices, the miners are cementing a new reputation for reliable dividends.

Given the resilient iron price, the payouts from BHP, Rio Tinto (ASX:RIO) and Fortescue could pleasantly surprise.

Fortescue’s dividend capacity is bolstered by the $1 billion-plus it won’t spend on two ditched hydrogen projects.

Price notes BHP paid an interim div one-third of that of two years ago. But the miner’s final payout should equate to an attractive yield (of around 3.5%, before franking).

So not all of the Magnificent Seven posse should be run out of town.

For the gold miners, cash is flowing in like rivers of – er -gold.

These days, they’re more inclined to share the spoils with investors rather than chase the next El Dorado deposit.