Upgraded ASX Yield Forecast Good News for Retirees

By Don Hamson | More Articles by Don Hamson

Plato Investment Management forecasts the ASX200 index will return a 4.8% gross yield in 2021. The forecast has been upgraded from the 4.1% gross yield Plato’s modelling was forecasting at December 31, 2020. 

Furthermore, Plato Investment Management’s Australian Shares Income Fund is targeting a gross yield of around 7.8%, an additional 3% delivered through the active management of a diverse portfolio of Australian dividend-paying equities. 

Dr Don Hamson, Managing Director of Plato Investment Management said the upgraded target comes following a thorough analysis of the February reporting window. 

“It’s been near impossible for retirees to generate any sort of meaningful income from cash in the bank or bonds for a number of years now and when dividends were slashed throughout 2020, I think many would have been facing the prospected of drawing down capital to keep the lights on. Thankfully, we’ve now seen a very swift recovery in dividends. 

“The February reporting season saw a number of companies declaring record dividends and what’s most encouraging is that many of those businesses that have handsomely rewarded investors, look to have strong tailwinds in the foreseeable future. 

Dr Hamson said banks and iron ore miners are leading the dividend recovery. 

“Strong profit announcements from the banks are a result of fewer than expected pandemic-related bad debts across the industry, resulting in the unwinding of provisions. Both ANZ and Westpac have been confident enough to write back some of their COVID-related provisions even before Job-Keeper ends on March 31. Barring any further outbreaks or deterioration of the economy, we expect even more write-backs. 

“Out of the Big 4, we think Commonwealth Bank looks to be best positioned when it comes to income for shareholders. Its $1.50 dividend equates to only 67% of earnings and the bank has said its pay-out ratio is likely to be 70-80% this year, so a stronger second-half dividend is expected. There’s also the possibility management will use excess franking credits to undertake an off-market buyback in the coming year, which will be a lucrative opportunity for retirees in particular. 

“When it comes the miners, we think this is a space income investors can’t afford to ignore right now. Of the top six dividend payers in Australia, three are now mining stocks. Are the payouts sustainable? Well, we think the supply and demand fundamentals for iron ore prices remain solid and if prices come off $100 per tonne from the highs, these companies still have good profit margins. Management at the big miners also seem to be learning from mistakes about over-investing in new mines which have impacted dividends in the past. 

“Outside of the banks and miners it’s the consumer discretionary sector that has been another major contributor to our upgraded forecasts. The likes of JB Hi-Fi and Super Retail Group have delivered in spades for investors and strong sales momentum in the first quarter of this year indicates the retail boom we saw stemming from the pandemic still has some way to go. 

“For retirees trying to generate income, this uptick in dividends is great news. We believe diversity, active stock picking which focusses on avoiding dividend traps and tax effective portfolio management will be the keys to getting even more from dividends in the coming 12 months.

Don Hamson

About Don Hamson

Don is the founding Managing Director of Plato Investment Management. He is well known as a leader in the practical application of after-tax investing. Prior to forming Plato, Don was Head of Active Equities, Asia Pacific at State Street Global Advisors.

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