Living in an era of historically low interest rates has forced investors to look for income outside of term deposits and bonds. This means upping the risk, but it can be done in a prudent manner by investing in blue chip, dividend paying, franking credit allocating companies in the Australian market.
Nonetheless, FY21 was a tough year for dividends with COVID seeing significant cuts across the market. Australian banks were particularly hard hit, as they battened down the hatches early on in COVID and largely cancelled their dividends.
There were some positives though, with the resource stocks being standouts all through this period and paying bumper dividends on the back of the surging iron ore price.
Furthermore, just as the global economy is now bouncing back, corporate earnings are on the rebound and we are looking at a big uplift in dividends in the current financial year.
While the current lockdown is a set-back, most companies have been trading well over the last 6 months, so they should be in good shape. Additionally, much of the earnings – and therefore dividends – from ASX companies is in fact derived in offshore markets such as the US, where COVID is in retreat.
Assuming that these lockdowns don’t go on for too long, the outlook is good, with the domestic economy proving remarkably resilient and confidence high across the board.
Surveying the local market, the big resources stocks will be printing cash and, having already paid down their debt to low levels, will be showering this on investors. Additionally, the banks are swimming in surplus capital on top of generous dividends and will likely return some of this as soon as they get clarity on the end of lockdowns.
The industrials are a mixed bag, but by and large, operating conditions are positive and balance sheets are in good shape.
eInvest’s actively managed income generator fund – EIGA – is providing investors with a yield of around 7%, including franking credits. By investing in Australian banks, resource and industrial companies, the fund provides investors a regular monthly distribution and a growing income stream over time.
Australian equities have traditionally been sought after for their income, particularly with their domestic franking credits. The rebound we are watching now should add to their attraction for investors, particularly in a world where competing asset classes, such as cash and fixed income, yield next to nothing.
Disclaimer: Please note that these are the views of the author, Tamas Calderwood, Distribution Specialist , eInvest, and is not financial advice.
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