TOL - 26th Apr, 2023
21 ASX-listed companies have yields higher than 10% today. Here's why this fundie still doesn't own any of them
But a few are starting to look very, very interesting...
A lot has happened in the last six months. We bid goodbye to a tortuous year for markets, witnessed the biggest bank failures since the Global Financial Crisis, and held on for dear life as the Reserve Bank of Australia pushed the cash rate 100 basis points higher.
In the December quarter, headline inflation in Australia hit a three-decade high of 7.8%. The most recent data point Australians have is the Australian Bureau of Statistic's monthly CPI read of 6.8% for the 12 months to the end of February.
And yet, over the past six months, the All Ords Index has lifted 8.33%. There are currently 34 stocks that have yields higher than the long-term market average of 8%. Hell, there are even 21 ASX-listed stocks with yields higher than 10% today.
And in this low-growth, inflationary world, yields of 10% or more couldn't be more tantalising, right?
Oh, my friend, didn't you learn anything from last time?
Around six months ago, I sat down with Forager's Steve Johnson for his take on the highest-yielding stocks on the ASX. Back then, he revealed he didn't own a single one of them. Today, he still doesn't, but he does believe the list is revealing.
"There are some important themes in this list in terms of how the whole market is positioned," Johnson says.
"When you look through this list of stocks that are yielding higher than 8-10%, there is a very strong expectation of recession in their share prices."
In this wire, Johnson shares why he still doesn't own any of the stocks on this list (but points to a few companies which are starting to look attractive). He also outlines six lessons investors can take away from this high-yielders list, and names a few companies where yields are starting to look more sustainable.
Note: This interview took place on Thursday 14 April 2023.
How to use the data below
As you can see below, there are 34 stocks listed on the ASX with yields higher than the market average of 8% per annum. As Johnson explains, this suggests that the market assumes this yield is going to go down over the long term (and could be a red flag of a dividend or yield trap).
"The assumption that I would take from any company that's yielding higher than what you can expect as a long-term return from equities is that other market participants do not think that yield is sustainable," Johnson says.
However, the market can sometimes get it wrong. So, you could invest in any of the stocks on the list below (after doing your own research), and the yield could turn out to be more sustainable than the rest of the market thinks.
So, without further ado, here are the highest-yielding stocks on the ASX...
There are 34 ASX-listed stocks with yields currently above the long-term market average
For clarification:
- DRP = dividend reinvestment plan
- 1-year return = price only
- The below data has been sourced from Market Index
- Hover your cursor over the table and scroll right to see more of the table
| Ticker | Company | Price | Franking | Yield | Gross | DRP | 1yr Return |
| TER | Terracom | $0.635 | 64% | 43.31% | 55.12% | No | 5.83% |
| YAL | Yancoal Australia | $5.87 | 0% | 20.97% | 20.97% | No | 7.31% |
| CRN | Coronado Global Resources | $1.625 | 2% | 20.85% | 20.99% | No | -30.56% |
| NHC | New Hope Corporation | $5.255 | 100% | 16.37% | 23.38% | No | 47.61% |
| RF1 | Regal Investment Fund | $2.83 | 0% | 15.75% | 15.75% | Yes | -29.60% |
| ACL | Australian Clinical Labs | $3.53 | 100% | 15.01% | 21.45% | Yes | -30.65% |
| MFG | Magellan Financial Group | $7.83 | 82% | 14.79% | 19.99% | No | -52.08% |
| IHVV | Ishares S&P 500 Aud Hedged ETF | $39.25 | 0% | 14.09% | 14.09% | No | -10.02% |
| HLI | Helia Group | $3.07 | 100% | 13.36% | 19.08% | No | 3.72% |
| VEA | Viva Energy Group | $3.19 | 100% | 12.76% | 18.23% | No | 21.76% |
| LFG | Liberty Financial Group | $4.00 | 0% | 12.30% | 12.30% | No | -23.08% |
| LFS | Latitude Group Holdings | $1.28 | 100% | 12.27% | 17.52% | Yes | -30.43% |
| IVV | Ishares S&P 500 ETF | $41.18 | 0% | 11.57% | 11.57% | Yes | 3.36% |
| ZIM | Zimplats Holdings | $25.85 | 0% | 11.46% | 11.46% | No | -24.44% |
| VSL | Vulcan Steel | $7.75 | 87% | 11.27% | 15.46% | No | -12.63% |
| BFL | BSP Financial Group | $4.84 | 0% | 11.26% | 11.26% | No | -3.20% |
| WDS | Woodside Energy Group | $34.755 | 100% | 10.80% | 15.43% | Yes | 7.30% |
| COF | Centuria Office REIT | $1.453 | 0% | 10.56% | 10.56% | Yes | -35.44% |
| WHC | Whitehaven Coal | $6.855 | 100% | 10.50% | 15.00% | No | 50% |
| CMW | Cromwell Property Group | $0.578 | 0% | 10.38% | 10.38% | Yes | -31.25% |
| HVN | Harvey Norman Holdings | $3.68 | 100% | 10.19% | 14.56% | No | -27.98% |
| GNE | Genesis Energy | $2.56 | 0% | 9.66% | 9.66% | Yes | 0.00% |
| WAM | WAM Capital | $1.68 | 100% | 9.23% | 13.18% | Yes | -26.64% |
| SUL | Super Retail Group | $13.39 | 100% | 8.96% | 12.80% | Yes | 25.73% |
| ALD | Ampol | $30.89 | 100% | 8.90% | 12.72% | No | -3.23% |
| FMG | Fortescue Metals Group | $22.44 | 100% | 8.73% | 12.48% | Yes | 3.84% |
| RIO | RIO Tinto | $121.25 | 100% | 8.63% | 12.33% | Yes | 0.59% |
| FBU | Fletcher Building | $4.205 | 0% | 8.61% | 8.61% | No | -26.61% |
| MMS | Mcmillan Shakespeare | $15.355 | 100% | 8.60% | 12.28% | No | 28.93% |
| PGF | PM Capital Global Opportunities Fund | $1.745 | 100% | 8.60% | 12.28% | Yes | 3.25% |
| BHP | BHP Group | $46.41 | 100% | 8.44% | 12.05% | Yes | -0.72% |
| VG1 | VGI Partners Global Investments | $1.605 | 91% | 8.41% | 11.70% | Yes | -8.02% |
| IPL | Incitec Pivot | $3.215 | 100% | 8.40% | 12.00% | Yes | -19.63% |
| PTM | Platinum Asset Management | $1.68 | 100% | 8.33% | 11.90% | No | -9.43% |
A word of warning: Investing in equities for income comes with risk
Johnson believes that investors should not view any stock, no matter how high its yields may be, as a substitute for the "income" portion of their portfolio.
"There is just too much risk around its earnings," he says.
"Having said that, they have historically been a very good inflation hedge. So if inflation is higher here, you're probably going to get long-term higher returns from equities as companies grow their profits and offset that."
The last time I spoke with Johnson, he pointed to Dalrymple Bay Infrastructure (ASX: DBI) as a sustainable high-yielder. This is because their fees are purely inflation-linked.
"You're going to get the current yield on that stock, plus you will get growth with inflation over time," he says, pointing to Transurban as another example of an inflation-linked high-yield stock.
"However, most of the stocks on this list have really high yields because people think they are going to go down, not up."
That said, the yields on stocks are somewhat more perpetual than putting your money in a term deposit, Johnson says, given you would have to figure out where to put your money after the term ends.
"We're in a much more balanced world and that is a good thing. You've got a choice, which is a reasonable one, to park your money in the bank and earn a decent yield on it," Johnson says.
"And you need to think about how much risk you are taking on for the additional return that you're getting from owning either a particular share or a portfolio of shares."
That's not to say equity income isn't important - it certainly is for the majority of Australian investors, Johnson adds.
"There is far more to think about when it comes to equities than just what the yield is because as you've seen with Magellan (ASX: MFG), you can buy something on a really high yield and watch the earnings evaporate pretty quickly," he says.
Six key learnings over the past six months
1. COAL STOCKS: THESE DIVIDENDS COULD BE MORE SUSTAINABLE THAN YOU THINK
The last time Johnson and I spoke, he argued that the yields for coal stocks were more likely to go up than down. As it would turn out, he was right, with coal companies taking out the top four positions on this list.
Johnson believes there are two important learnings for coal companies:
- The coal price is down from where it was, but it has held up reasonably well. This means there are probably more dividends coming down the track than many would have anticipated.
- Coal companies have paid out less of their earnings than people would've hoped. And many are paying out a 20-40% yield. That shows you how profitable these companies were.
"I think one of the surprises for reporting season was that the coal companies didn't pay out more in dividends. A lot of investors in those stocks were expecting almost a full payout of profits and cash flows and most of those mining companies have held onto a fair bit of cash," Johnson says.
"I think there's now a case here for a higher for longer yield. Although people should still expect that it falls over time."
He believes investors can hope for a +10% yield from coal companies, given they have held on to a lot of these profits. It's just not going to be as the 20-40% we are seeing now.
2. NON-BANK LENDERS: SPECULATIVE BUT INTERESTING
For those willing to walk on the wild side, Johnson names non-bank lenders as an area of the equity yield spectrum that is becoming more and more interesting (given the share prices have been hit incredibly hard over the past 12 months).
"I think the non-bank lenders like Latitude (ASX: LFS), Liberty Financial (ASX: LFG) and Pepper Money (ASX: PPM) are into speculative but interesting price ranges," Johnson says.
"Even with the Latitude data breach, I've been astonished at how little an impact it has had on the price. It's actually higher than it was before they announced they'd been hacked! But it has been hammered over the past year or so and it trades on a very low multiple."
He also points to mortgage lenders like Pepper and Resimac Group (ASX: RMC) as possible opportunities for the brave.
"You're paying very, very low multiples for those businesses and the assumption is that house prices will continue to fall, we'll have a recession, and people will struggle to repay their mortgages," Johnson says.
"But if it's milder than that, then I think you'll do perfectly well buying those stocks. This is actually an area of focus for us at the moment - trying to pick through the debris of that non-bank lender space."
3. FUND MANAGERS AND LICS: HERE'S WHERE YOU NEED TO BE CAREFUL
For Johnson, Magellan (ASX: MFG) is a perfect example of why some of the stocks turn up on this list of high-yielders - the market knows that profitability (and ultimately yield) are unlikely to be maintained in the future.
Which income stocks are starting to look interesting?
"Magellan is a lesson in not extrapolating historical dividends into the future," he says.
"You need to analyse the business and work out its capacity to pay those dividends. In this case, Magellan's FUM is down very, very significantly. And at the moment, there are no signs of that stopping."
While Johnson refrains from naming any other names, he does note that some of the yields of the fund managers and listed investment companies on this list could be sustainable - but most, he argues, are not. He recommends investors embrace a healthy dose of scepticism when assessing the yields of investment companies.
"Ultimately your returns are completely dependent on how much return the fund makes. At the moment, some of these investment companies are paying out dividends that are well in excess of what their returns over the past five years has been," Johnson says.
"I see a lot of retail investors getting sucked into this fully franked dividend mirage and they should really be focused on the performance of the fund and how sustainable that dividend is based on underlying fund performance."
If a fund manager is paying a higher dividend yield than its fund performance, you are basically getting back some of the capital you initially invested (your principal) over time. It's not the end of the world, but your capital value is going to go down - which obviously, is not ideal.
4. OFFICE-RELATED REAL ESTATE INVESTMENT TRUSTS: CHANGING LONG-TERM DYNAMICS
Six months ago, Centuria Office REIT (ASX: COF) made it onto the list. Today, there are two office-related REITs, with the addition of Cromwell Property Group (ASX: CMW).
"There's a huge debate right now about working from home," Johnson says. "Are people coming back to the offices? What do high-interest rates mean?"
"The fact that they're turning up on this list is not surprising. It's people questioning whether the historical yields are sustainable or not and an interesting place for investors to be spending some time."
While Johnson believes they are likely to face challenges going forward, he does note that everything has a price.
"We're not there yet, but it's interesting that they have fallen so much," he says.
5. DIVERSIFIED MINERS: PROBABLY A SAFER BET
Johnson believes that diversified miners like South32 (ASX: S32), BHP GROUP (ASX: BHP) and Rio Tinto (ASX: RIO) will probably be able to pay out more sustainable dividends from here.
"They've just got more strings to their bow than just coal," Johnson says.
"There are multiple different commodities that can allow them to pay dividends. If the iron ore price is not up, they've got something else that is working that allows them to pay more reliable dividends."
6. COVID WINNERS: IT AIN'T LOOKING GOOD
The future doesn't look too rosy for COVID-winner Australian Clinical Labs (ASX: ACL).
With a yield of 15%, ACL is currently the sixth highest-yielding stock on the ASX. But Johnson argues there's no chance the current yield is sustainable.
"Their half-year profit was already down 50%. ACL looks like it's on this crazy fat yield, but that is probably going to halve or more over the next year," he says.
Which income stocks are starting to look interesting?
Oh, my friend, you've come to the right place.
While we've established that Forager currently does not own any of the stocks on his "high-yield" list, Johnson names Nick Scali (ASX: NCK) and JB Hi-Fi (ASX: JBH) as two companies that currently look interesting. For reference, NCK currently has a yield of 7.73% and has dropped 12.93% over the past 12 months. JBH currently has a yield of 7.76% and has fallen 11.63% over the past 12 months.
"They are on our love-to-own list and they're getting closer. You can see that in the yields here. The prices are down quite a bit over the past few months," he says.
"So those two stocks are candidates for us that are still not in the portfolio, but are interesting."
He also points to Tabcorp (ASX: TAH) as a stock on his wishlist, and one that is likely to have a sustainable yield to boot.
"There are some weird things happening there with the split, but I still think it has a sustainable 7-8% yield," Johnson says. "I think that one is an interesting candidate for us as well that we don't own.
He also names Viva Energy (ASX: VEA) as a possible sustainable dividend player, as well as Harvey Norman (ASX: HVN), which Johnson argues could navigate through the current period of economic and consumer weakness "just fine and in five years time the yield will probably be higher than it is today."
"Similarly, Latitude (ASX: LFS), Liberty (ASX: LFG), and Pepper (ASX: PPM). These are three very similar businesses that, if you don't have a recession and they don't suffer lots of defaults, that yield is going to look very attractive," Johnson says.
This is because, as we mentioned at the outset of this piece, this is a list of stocks that are priced for recession (except for the coal stocks).
"Depending on how bad that recession is, I actually think you could buy a whole portfolio of these companies and it wouldn't be horrible," Johnson says.
"You've got quite a bit of diversity in terms of the type of business. And the companies on this list are paying out most of their profits as dividends. So I think it is quite an interesting list."
So, if you did want to invest in this hypothetical portfolio, when would be the best time to do so?
Johnson believes the best time to invest is when the gap between the portfolio's yield and the average market yield is at its widest.
"It's probably the same as the Dogs of the Dow. You want to do it when things are down 70% and 80%, not when they're down 10% and the whole market's blowing up," Johnson says.
"If you wanted to be contrarian about the market at the moment, you could probably put together a portfolio of them all and I think you'd do okay."
We'll just have to see on that one...
Want to learn more?
If you share Steve's passion for unloved bargains and have a long-term focus, click here to learn more about Forager. If you enjoyed this wire, you can follow Steve here for more of his insights.
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Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your Money, Sky Business and Sky News.
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Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian...
Expertise
Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian...
Expertise
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