Dividend Stocks and how they work?
Has your portfolio suffered with firms cutting dividends due to Covid19? The big 4 banks cut their dividends in half as regulatory authorities put a cap on dividend payouts – not more than 50% of its earnings, they said. While you can continue to hold bank stocks on the notion that it may eventually come good, it looks like it will take a long time if that is going to happen. That being said, there are still stocks out there that pay good dividends – stocks that are expected to perform better than others. But finding the best dividend stocks on the ASX can be tricky at this stage and we are here to help you do just that and build a dividend stock strategy for your portfolio.
Top ASX dividend stocks in 2020
For reasons we mentioned earlier, you may not see the usual banks and giants such as BHP on this list. Also, we do not believe that you really need our help to figure out if the banks can afford to pay high dividends in the future and be considered as the high dividend stocks on the ASX. Below are the best blue-chip stocks that pay high dividends:
IOOF Holdings (ASX: IFL)
The financial services giant is part of the ASX200 index with over 500,000 clients and $202 billion in funds under management. IOOF Holdings is also one of the best dividend stocks priced under $10. The firm offers financial advice, portfolio management, investment management, and estate administration services in Australia and New Zealand. IFL has been a steady performer in the past and has had a particularly good last couple of years since the Royal Commission debacle. Growth rates have been stellar in the revenues department – 40% in FY2019, and 10% in FY2020. A reduction in operating expenses resulted in net income growth of 400% in FY2020.
The rock-solid balance sheet of IOOF Holdings shows total assets exceeding total liabilities by 1.7x in the recent financial statement – an indicator of good long-term financial health of a firm. The cash position however, has decreased considerably due to the acquisition of NAB’s wealth management business, MLC. The strategic acquisition comes at a time when the financial services industry has been disrupted with scandals and mismanagement, and IOOF Holdings taking advantage as its rivals lose market share. The synergies from these acquisitions are sure to boost the earnings of IFL, and we will also see a growth in the total addressable market for the firm, all while its rivals become weaker.
With the latest dividend coming in at 11.5 cents per share, IOOF Holdings is a blue-chip stock that pays high dividends.
Spark Infrastructure Group (ASX: SKI)
Spark is in the business of electricity transmission and distribution in Australia by way of investing in firms that do just that. This means, SKI’s revenues are dependent on the performance of its portfolio companies in an industry that is highly regulated. Spark is part of the ASX100 index – the index that tracks the top 100 firms on the ASX by market capitalisation, and is hence, a blue-chip stock that pays a high dividend. The firm has suffered from a decrease in demand for electricity due to pandemic induced restrictions. However, has not utilised any financial assistance from the Government to offset any dips in performance during these unprecedented times.
Spark maintains an average EBITDA margin of 94% through its business, a sign of stability and performance of its assets. A 7cps distribution for HY20 is to be paid in September due to good performances, a discount of 2% has been applied to its Distribution Reinvestment Plan. The financial health of the firm is strong with its total assets exceeding total liabilities by over 2x. The firm has also recovered from the asset write down by virtue of an ATO ruling in 2018, and its return on assets, capital, and equity have bounced back since.
The stable business came with a dividend of 7 cents per share in its most recent payout, and we expect the demands to bounce back as Australia is far ahead of the other developed markets in the post-pandemic recovery. With the stock trading just over $2 at the time of this report, it is another one to add to the list of the best dividend stocks under $10.
Fortescue Metals Group Limited (ASX: FMG)
FMG’s reputation precedes itself and there is probably nothing we can tell you about the firm that you do not already know. However, for those of you who need a recap – Fortescue Metals Group Limited is a mining giant that derives its revenue from the exploration, development, production, processing, and sale of iron ore. It has operations in Australia, Singapore, and China and is administered by its head office in Perth.
The stock looks to have shaken off the March downturn and is closer to the 52-week high than the low. The stock has reacted to the financial performance report ending June 2020. Revenues grew by 28% from the previous year. Net cash from operating activities was 47% higher than in the previous year primarily as a result of the increase in underlying EBITDA. The guidance and demand for the metal forecasts strong performances in the years to come.
The company has announced a final dividend of $1.00 per share, fully franked, which takes the total dividend paid in FY 2020 to $1.76 per share, up 54% compared to FY 2019. This reflects 77% payout of FY 2020 net profit after tax (NPAT), at the higher end of 50-80% of full year NPAT as per the company’s declared dividend policy – making FMG arguably one of the best dividend stocks on the ASX in 2020.
How to choose the Best dividend stocks?
To answer the million-dollar question – how to choose the best dividend stocks? We have to look at quite a few metrics (not just earnings and profitability) of the individual stocks and also certain macro-economic factors. Our income portfolio does just that and then some. But for those of you who are not subscribed, we figured we can let you in on a few income stocks we hold in this blog.