If there is anything we Australians love more than backing the underdog or a Bunnings banger, it's bang for our buck. Perhaps, this is why we worship the ground upon which our dividend stocks walk, with capital gains and a regular share of a company's earnings the reward for our adoration. 

So, in this episode of Buy Hold Sell, we thought we would take it to the experts to get their take on the highest-yielding stocks on the ASX. Livewire's James Marlay spoke to Investors Mutual's Michael O'Neill and Plato Investment Management's Peter Gardner to discuss these five sky-high yield candidates. 

However, a word to the wise, high yield can often be a tantalising trap. For this reason, the highest-yielding stock on this list (around 20% trailing yield), was dubbed a "sell" by both our experts.

Stay tuned for a return of our new segment, Questions Without Notice, where Michael and Peter answer your dividend questions. These include how the end of the government's JobKeeper and JobSeeker payments will impact dividends and two undiscovered small caps which can provide investors with yield. 

Note: The stocks featured in this episode of Buy Hold Sell were chosen for their high trailing dividend yields (dividends over 12 months divided by share price). There are a variety of reasons why yield may be high, for example, a one-off special dividend or a plunging share price. Watch, read or listen to the discussion below. This episode was filmed on 3 February 2021. Trailing yields in edited transcript taken from the date of filming. 

Edited Transcript 

James Marlay: Welcome to Buy Hold Sell brought to you by Livewire Markets. My name's James Marlay and today we're talking about the stocks with some of the highest yields on the market. Joining me to talk about big dividends, is Dr Michael O'Neill from Investors Mutual and Dr Peter Gardner from income specialist, Plato Investment Management. 

Peter, I'll start with you. Orora, looking backwards, big yield, 20%. Looking forwards, buy, hold, or a sell?

Orora (ASX:ORA), trailing yield 20.04% 

Peter Gardner (SELL): It's a sell for us. So as you pointed out, the big yield looking back was due to a special dividend they paid in June as a result of selling their business. They then cut their dividend substantially in September, and we expect that kind of low level of dividend to continue going forward. So we're expecting around that 4 to 5% yield going forward, but we just think there's a lot of challenges in their business. One of their major customers, Treasury Wines, is undergoing all those problems with China. And so we don't think there's too much growth in the business for the price that you're paying.

James Marlay: Okay. Michael, Orora, buy, hold, or a sell?

Michael O'Neill (BUY): It's a buy for us. We agree that the yield outlook is about 4.5 to 5%. It's got a very strong balance sheet, there is an ongoing buyback in place. We agree that there are some challenges in some divisions, but the core divisions in beverage packaging, aluminium cans and glass in Australia and the US, where they are a top-two player in Australia, and a top-five player in the US, are both very resilient businesses. We think that underpins a very secure and low-risk yield.

Centuria Office REIT (ASX:COF), trailing yield 8.79%

James Marlay: Staying with you, Centuria Office REIT. We know office has been under pressure. Centuria is a good manager with a nice yield. Buy, hold, or sell?

Michael O'Neill (HOLD): It's a hold for us. It's trading about 20% discount to NTA. Now we are very cautious on the sector, but when it comes to office REITs, this is one of our preferred ones. And the reason is 75% of their tenants are government or multinationals. So you saw the quality of that tenant base come through in collections through COVID, which bottomed out at 89%. And we've also seen transactions go through, which justify their asset value. For instance, their recent sale in Chatswood, which was at a 7% premium to book value.

James Marlay: Okay. Peter, Centuria Office REIT, has it got a spot in the portfolio for you guys?

Peter Gardner (HOLD): It does. It's a hold for us, and very similar to Michael. As you pointed out, it's a challenged industry, but they're one of the better players in the industry and so we like it.

AGL Energy (ASX:AGL), trailing yield 8.48%

James Marlay: Staying with you. AGL, buy, hold, or a sell? Circa 9% yield.

Peter Gardner (SELL): Yeah. It's a sell for us. Their business is under real pressure at the moment, not necessarily due to what management is doing, but just because of the overall industry dynamics where electricity wholesale margins are under significant pressure at the moment. We commend the management for trying to move into renewable energy. Obviously, that's the way of the future. However, it's pretty challenging for them to do that given the amount of solar panels that are being installed by individuals on roofs. And so we just think they're in a pretty challenged area at the moment.

James Marlay: Okay. Does an 8% yield spark your interest in AGL?

Michael O'Neill (SELL): It's a sell for us too, James. I mean, it's fallen 50% roundabout in the last year, but those pressures on wholesale electricity prices and growth in renewable supply are not going to go away. And they're also suffering pressure in their retail gas margins.

Fortescue Metals Group (ASX:FMG), trailing yield 7.43%

James Marlay: The unconventional part of the market for dividends, but they're starting to build up a track record. Fortescue Metals, spewing out cash. Buy, hold, or a sell?

Michael O'Neill (SELL): It's a sell for us. Fortescue as a pure-play iron ore producer has benefited more than the other large listed miners from the growth in the iron ore price from $100 per tonne at the start of the financial year to $160 per tonne. We look at commodity stocks and we believe they follow commodity prices. So when that supply-demand imbalance in the market corrects, not only are your longer-term dividend prospects impaired but also your capital value is at significant risk.

James Marlay: That's the main argument against owning miners for dividends. Peter, is Fortescue a buy, hold, or a sell?

Peter Gardner (BUY): It's a buy for us. So we agree with what Michael was saying, but we just think the cycle is going to take a lot longer to play out than people expect. And in terms of what the market's pricing, the market is not pricing iron ore prices to stay up $150 a tonne. Everyone knows they're going to come back, it's just a matter of when, and we think it'll take longer. And so you've got to take advantage of those dividends and good capital returns while they're there.

Aurizon Holdings (ASX:AZJ), trailing yield 7.12%

James Marlay: Well, I guess somewhat related to the boom in commodity prices is Aurizon, transport, infrastructure. Nice yield over 7%. Buy, hold, or a sell?

Peter Gardner (BUY): It's a buy for us. It's also been challenged in the last year, mainly through the move away from coal, and particularly after China's export ban on Australian coal (Aurizon transports coal from the mines to the ports). And so it's come under a lot of pressure from that. However, we just think with the amount of coal power plants that are being built in Asia, that that'll take a bit longer to play out than people expect. And so the yield is just too high and the value is too good for us to look past it.

James Marlay: All right. Do you see the same juicy value in Aurizon? Is it a buy, hold, or a sell?

Michael O'Neill (BUY): It's a buy. Completely agree with everything Peter said. I mean, the yields at about 7%. 60% of their business is regulated, they do have an ongoing market buyback. 40% is unregulated, the haulage services under 10-year contracts are some of the lowest-cost coal producers. Certainly, falling coal volumes is not a good thing for Aurizon, but there are a lot of mitigating factors under their take or pay contracts.

James Marlay: Well, our two guests don't agree on everything, but one thing is for sure, you're going to find better than 0.1% income if you go looking for some dividends in the equity market.

Questions Without Notice

James Marlay: Ladies and gentlemen, in 2021, we're really encouraging you to get more involved in our episodes of Buy Hold Sell. And one of the ways that we're doing that is encouraging you to send through the questions that you've got to our experts on the panel. And we've got a couple of reader questions that have come through on income.

Peter, I'm going to start with you. I think this is really topical actually. What impact do you believe the end of the government's JobSeeker and JobKeeper packages at the end of March will have on dividends? What are some of the potential things people need to keep an eye on?

Peter Gardner: Well, there's not too many big listed companies that are going to have a big impact from this, unless the economy turns down significantly. But the biggest one would be the bank area, in that if we see the end of the JobKeeper and a lot of businesses start going broke at that point. I mean, generally, when you have a recession, businesses start to go broke towards the end of the recession, rather than beginning as they hold out as long as they can. However, the government stimuli have been so significant that we think businesses are probably in a pretty good condition. And unless we have a few significant COVID outbreaks and businesses have to shut down again, we don't think bad debts are going to be too bad for the banks and we don't expect it to have too much impact on dividends.

James Marlay: Michael, have you got anything to add to that? I mean, it's been a massive stimulus package. Are there any kind of pitfalls to be aware of, particularly from an income perspective

Michael O'Neill: Well, just to reiterate what Peter said, I think that March to June period is a critical time for the banks. Not only because of JobSeeker/JobKeeper, but also because the deferral measures roll off and we finally get to see what's happening in the real economy with the health of SMEs. I guess it's really a question of any sector that's leveraged to increasing unemployment and that risk, looks like that risk is lower than we had expected.

James Marlay: Last week we shot an episode on small-caps. We struggled to find small caps with a decent yield from the ones that we screened the market for. Are there any undiscovered small-caps, or maybe they are well discovered, that provide a sustainable yield? Do you have an example of a company or a particular part of the market?

Michael O'Neill: Probably a mid-cap, but Abacus Property Group (ASX:ABP) is one of the REITs that's been left behind. Decent yield, decent assets, particularly their storage assets.

James Marlay: Same question to you, Peter. Something in that small space?

Peter Gardner: So we really like Adairs (ASX:ADH) at the moment. So it's obviously benefiting from a lot of that furniture spending and otherwise, but it looks on a pretty strong yield at the moment. Their earnings are going up significantly. They've got a really good online channel, which has benefited during COVID. And so we like it at the moment.

James Marlay: Well, thanks very much for sending through your questions, keep them coming and we'll be back with our next episodes coming up next week.

Do you have any questions on global stocks for our fundies?

Give this wire a like if you've enjoyed the discussion or hit follow to be notified when we release more episodes. Next week, Vihari Ross and Chris Demasi take you through their favourite global stock picks. Let us know your burning global stock questions in the comments section below, and we will get Vihari and Chris to answer them in Questions Without Notice. 

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