Buy Hold Sell: 5 high-yielding ASX stocks paying above-market dividends

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Edited transcript

James Marlay: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name's James Marlay, and in our recent investor survey, we asked people what was top of the shopping list when it comes to buying assets for their portfolio. As we look ahead, high-yielding stocks are top of the pops, not surprising given some of the changes in the backdrop with the budget and the appeal of those regular, fully franked dividends. So, we're going to be diving into some of the higher-paying dividend stocks with a market cap over a billion dollars today.

To help me diagnose these dividend darlings, I've got Dr Michael O'Neill from IML and Dr Peter Gardner from Plato. Gents, great to have you in. Thanks for coming along.

Bank reporting preview

Before we get into the individual stocks, we're just going to do a quick check-in on the two monster dividend-paying sectors in the ASX 200: banks and miners. Banks have got their reports coming up. Pete, do you want to give us a quick preview? What are you expecting as we head into bank reporting?

Peter Gardner: So we think the bank results will be soft, but not terrible, is kind of our summary. We're not looking at a doomsday scenario for the banks in the short term. Their growth will definitely be low, but given the unemployment rate is still low, people generally keep on paying their mortgages as long as they've got a job. The amount of money in offset accounts is also pretty healthy, and so we're not expecting big defaults, albeit we do expect some tick-ups in the provisions that the banks will make. So I think that will slightly soften their results.

We don't expect much loan growth going forward given the changes, as you mentioned, in the budget, and also the interest rate increases and property market softening. There's a lot of worries there, but that doesn't affect the banks' back book, if that makes sense. So it affects their growth going forward, but we still expect them to have pretty solid earnings in terms of their back book. So they're soft. We're definitely underweight the banking sector, but we're not expecting terrible results.

James Marlay: Okay, underweight the sector. If there was one bank out of those that are going to report, I think all bar CBA, do you have a pick?

Peter Gardner: Not particularly. We kind of like Westpac at the moment, but yeah, we don't have a strong view on individual banks.

James Marlay: Michael, anything you want to add on bank reporting? What are your expectations?

Michael O'Neill: Yeah, look, I think Pete's right. We are in a benign environment. The unemployment rate has ticked up a little, but we certainly haven't seen any spillover from private credit markets into retail, development, or construction, so bad debts are looking benign.

Volume is under pressure. We saw a 12% to 20% fall in mortgage applications post-budget changes across the banks. I think NAB had the most bearish forecast: 2.5% mortgage growth for the coming year. We haven't seen that sort of number since COVID.

What that really means, though, is margins are going to be under more pressure, so the banks are probably going to continue to compete to hold their volumes flat. And then the focus comes on costs, like we saw with NAB's intended restructure to pull out headcounts. If you've got negative jaws and the revenue environment is tough, the focus is on costs, and then payout ratios for some of the banks might start to look a little bit extended.

James Marlay: On the dividend front, any particular expectations? Holding dividends steady, what's the view there?

Michael O'Neill: Oh look, CBA has got the most conservative payout ratio. Some of the others are a little less conservative around the margin. You might see some expectations being hosed down for future payout ratios, I expect.

Mining dividend outlook

James Marlay: Okay. Well, let's switch from banks to miners. It's been a tough environment for banks to grow earnings; miners have had a really good run over the past few years. What is your outlook for the mining sector? They're not reporting in the imminent future, but we've had a bit of news recently. Have you got any views on that part of the market for dividend sustainability and any key picks there?

Michael O'Neill: Yeah, so we've been heavily underweight the miners because of that exact issue: we're past the point of capital returns and peak iron ore prices. Where we have had a conviction holding was in BHP. This time last year the stock price was 50% lower than it is today, though, so we had a 10% position there, which, as you'd expect, we've pared back. The dividend yield is about 3.6%, in line with the market. If you can enhance that with a bit of option writing, that's okay, but BHP Group (ASX:BHP) really is the pick of the bunch given the tier-one assets they hold and the diversification across coal, copper, and iron ore.

Iron ore supply-demand dynamics aren't that favourable, particularly with Simandou coming on. Copper is favourable, but we see BHP as being priced for that today.

James Marlay: Peter, it's a part of the market that Plato has been pretty active in over the past few years. Have you got a view on the miners and any preferred picks in that space?

Peter Gardner: Yeah, so we generally like mining for dividends, and one of the reasons is that miners pay about a third of total Australian company tax on average across the cycle. That means when they pay tax, they generate franking credits, and then they want to pay them out as dividends. So we think mining is a good place to harvest dividends, but as you say, there's obviously a cycle. We've been going through a good part of the cycle recently. Copper prices are at all-time highs because of the AI build-out, and that's really positive. BHP now has over half of its earnings coming from copper, which is one of the reasons why it's had such share price strength.

Given the volatility of mining profits and earnings, though, we do think they are best held as part of a diversified portfolio. We wouldn't recommend clients hold all their money in just mining stocks because they're going to have a pretty wild ride, but we generally do like them and we also like BHP given its strong copper earnings.

Telstra Group (ASX: TLS)

James Marlay: Let's dive into a few specific stocks. As I mentioned, $1 billion-plus market cap. Our first one has been a dividend staple over the years and would probably be in a lot of investor portfolios. Telstra: buy, hold, or sell?

Peter Gardner: (SELL) It's a sell for us now. We've liked Telstra for a while; however, its share price got quite a bit ahead of its earnings. It has come back recently, but we still think it's a little bit expensive in the current market.

Added to that is the challenge around Starlink and the extra competition that brings to the Australian market. We don't think Telstra's earnings are going to disappear or anything like that, but if you look at what Telstra offered, it was the premium provider: if you wanted the best mobile coverage around Australia, you went with Telstra. That has now changed, with Starlink arguably offering even stronger satellite coverage. That takes the top off Telstra's earnings, and that's the reason it's a sell for us.

James Marlay: Michael, Telstra is often referred to as a bit of a bond proxy. I think you could probably generate almost the same income out of the bond market itself at the moment. Buy, hold, or sell on Telstra?

Michael O'Neill: (HOLD) It has moved back to hold territory for us on a similar thesis. We owned a lot of Telstra lower down for a long time on the thesis that mobile margins were unsustainably low. Optus has now returned to profitability and is heading towards earning its cost of capital, so the thesis has matured and we've significantly reduced our weighting. At some point, when profit returns, competitors step in and that gets competed away.

I do agree that although Starlink satellites don't represent a complete replacement for mobile networks, they do erode the perceived value that consumers place on Telstra's network advantage.

Woodside Energy Group (ASX: WDS) 

James Marlay: Okay, our next stock is Woodside: a 6% dividend and a pretty good part of the market lately. Buy, hold, or sell?

Michael O'Neill: (HOLD) The 6% yield is quite attractive. Oil and gas markets are at elevated cyclical levels because of geopolitical issues, and Woodside does have great assets, the North West Shelf is the biggest LNG project we have in Australia.

We prefer Santos over Woodside based on the capex profile. It has improved for Woodside, they are 98% of the way through Scarborough now, and they've pared back their new energy spend aspirations, which were previously $5 billion. However, they've still got $4 billion to $4.5 billion to spend on Louisiana LNG and Mexico over the next year, which will restrain their free cash flow.

James Marlay: It's got quite a good growth profile over the next five or so years. Buy, hold, or sell, Pete?

Peter Gardner: (BUY) It's a buy for us. As Michael said, geopolitical events have been driving oil and gas prices up, and at the moment, it's hard to see those challenges going away. I'm not sure how Trump resolves the situation with Iran at the moment, so we see oil prices staying higher.

One of the big reasons we like Woodside right now is that it's a great portfolio diversifier. If you look at what causes the broader market to sell off at the moment, it's when the oil price goes up: inflation is viewed as higher, bond yields rise, and the market drops as a result. Woodside does well in that environment, making it an excellent diversifier for our portfolio.

AGL Energy (ASX: AGL)

James Marlay: Very good. Our next stock is AGL Energy, let's stay with that theme. A bit over a 5% fully franked dividend, but not a lot of growth to speak of. Buy, hold, or sell?

Peter Gardner: (SELL) It's a sell for us. AGL is challenging at the moment given the uncertainty around what Australia's energy mix is going to look like over the next 10 to 20 years. The government doesn't really know, the companies don't really know, and the market doesn't really know what that will look like. How profitable will batteries be as coal-fired power plants gradually turn off over time? How much will gas remain part of the electricity grid? There are just too many unknowns. In that sector, we much prefer Origin, which produces a lot of its own gas through APLNG. We think that's a much stronger business.

James Marlay: Pete prefers Origin. Are you a buy, hold, or sell on AGL, Michael?

Michael O'Neill: (SELL) I agree with Pete's reasoning, and to add a little bit: for FY27, they clearly have strong support under their dividend, but FY28 is going to be a trough year. They have a confluence of events: their Hunter Valley coal contracts and a cheap legacy gas contract roll off, coinciding with higher wholesale forward contract expiries and less volatility. Who knows how quickly batteries and new generation will fill the gap. FY28 is a trough, and it's not clear whether you'll see a growing dividend profile from FY29 onwards.

Suncorp Group (ASX: SUN)

James Marlay: Our next stock is Suncorp. It's been a good environment for insurers, if you check your insurance bills, premiums are flying through the roof along with electricity bills. Buy, hold, or sell on Suncorp?

Michael O'Neill: (BUY) We've done very well owning Suncorp over the last five years, and it's still a core holding. Why? The quality of the business has improved over that time, and it still looks quite attractive relative to the banks. It is a cleaner, domestically focused home and motor insurer. Their margins are more resilient today than they have been historically, they benefit from higher bond yields, and they've just lined up a strategic reinsurance deal that dials down the volatility of their earnings. We see a steadier dividend profile and the prospect of further buybacks or special dividends.

James Marlay: Steady dividends, buybacks, and specials, sounds pretty good to me. Pete, buy, hold, or sell?

Peter Gardner: (HOLD) We think Suncorp is definitely better than the banks, but we'd still put it on a hold for us at the moment. We prefer QBE in the insurance space. Suncorp has been benefiting from yields going up, which helps investment earnings, and they've also been supported by corporate interest.

The challenge is that premium rate increases, while very strong over the last couple of years, look like they are dialling down quite a lot going forward. I don't think they'll have as strong a tailwind there. Plus, there are the seasonal weather risks around cyclone activity in North Queensland. We'll see if that materialises this year, I hope it doesn't, but it remains a real operational risk for Suncorp.

JB Hi-Fi (ASX: JBH)

James Marlay: Our final stock is not one that you would traditionally have put into the pure income category, but its share price has come off a bit and it yields over 4% fully franked: JB Hi-Fi. It's been tough in the retail space. Buy, hold, or sell?

Peter Gardner: (HOLD) It's a hold for us. JB Hi-Fi is a company we've loved over the years; it's a genuine category killer that takes market share from its competitors. However, there are two big headwinds at the moment that keep us on hold.

One is the broader property market, which particularly impacts The Good Guys business because people generally buy white goods when they move or purchase a home. The second pressure comes from rising electronics prices: the AI build-out has caused the price of both chips and memory to surge, which drives up the cost of new laptops and consumer tech. In their recent August update, they reported negative sales for the July period, which is the first time in over 10 years that they've seen negative sales in that window. We think that's a near-term challenge, so we're happy to sit on the sidelines for now.

James Marlay: Buy, hold, or sell on JB Hi-Fi, Michael?

Michael O'Neill: (HOLD) I agree that it's the category killer in retail; execution is key. They always seem to be on top of the next emerging consumer trend and they benefit from superior lease terms compared to others in the space, effectively acting as an anchor tenant.

Again, we are seeing macro pressures from consumers trading down, and suppliers are pushing through higher input costs around chips and memory. That said, JB Hi-Fi does have levers to pull: they have a flexible cost base that helps insulate profitability, and if you walk into a store now, you'll see them promoting heavily to win market share. At the right point in the cycle, it is the discretionary retailer you want to own.

James Marlay: I got bombarded by JB Hi-Fi emails post their August result, they were definitely looking to hit the gas. All right folks, well, there's a review of five higher-yielding dividend stocks, with a mix of buys, holds, and sells.

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