The major miners BHP, Rio Tinto and Fortescue endured a horrible run during the mid-2010s amid the commodities meltdown. After battening down the hatches and disposing of assets, the producers simplified their businesses and focussed on splashing cash back to shareholders.

The sector’s turnaround has been so impressive that the three giants boosted dividends by an aggregate 84% to $28.3 billion over the last five years, compared to flat growth for the Big Four banks (see table at the bottom of the page). Last financial year saw the big miners beat the banks with gross yields north of 10% (inclusive of special dividends), and 70% of respondents in Livewire's annual survey believe that the sector will be the better place to dig up dividends again.

In this episode of Buy Hold Sell, we invited Jun Bei Liu from Tribeca Investment Partners and Matt Williams of Airlie Funds Management to debate resources versus banks for income, their favourite stocks in the sectors, and two bold ideas outside those sectors for yield-hunters.

You can watch the video or read the edited transcript below.


Edited Transcript

Vishal Teckchandani: Welcome to Buy Hold Sell brought to you by Livewire markets. My name is Vishal Teckchandani and today we're going to talk about where you can find those rivers of income gold in 2020. Joining me on the panel is Jun Bei Liu from Tribeca Investment Partners and Matt Williams from Airlie Funds Management. Now folks, I'm going to set the scene first of all, so Livewire conducted its annual investor survey recently and we found that most investors reckon that the big miners are going to be a better place to earn dividends than the big banks. ‘Mine-blowing’ stuff if you ask me.

Digging for dividends

Vishal Teckchandani: Jun Bei, what do you reckon? Big miners for dividends?

Jun Bei Liu: Oh, absolutely. We've already seen the quarterly reports and that's been pretty good and we expect during the reporting season, we'll see big dividends coming through. But comparing to the banks, I think bank dividends look okay too. It's just that earnings growth is a little bit challenged for the short term.

I like BHP (ASX:BHP) and I think it's well-diversified and it's possible that it will give a good capital return. And I think Rio Tinto (ASX:RIO) is not too bad either. But my favourite at this point is actually Fortescue (ASX:FMG).

Matt Williams: I do agree in the short term about the gushing of dividends I think we'll get from the resource companies. They've shown over the recent times much more discipline around capital allocation and the balance sheets are in great shape. And look it doesn't hurt that the iron ore price has held up much higher than most analysts had forecast, held up higher for longer. So, I think it's going to be a great short term dividend theme.

But I guess banking on a long-term strategy of a dividend stream from the resources is a bit dangerous. I think back solving for a dividend income, a level of dividend income, into then a company I think is the wrong way around. I think if you look for good companies, be they resources or banks and you hold them and hope you get dividend growth, but as long as they're good companies and grow, then over time you should through the volatility you should do fine.

If suddenly iron ore was US$60 a tonne instead of the 90 odd it is now, then you know those dividends are going to be under pressure very quickly.

Like Jun Bei I like BHP (ASX:BHP) for its diversification really. In that sense and the whole sector, really the iron ore sector, it's quite interesting when you look at the other commodities have been under pressure, are lower, but you've seen a real bit of discipline from all the iron ore players around supply. So I think that's part of the reason we've got such a good iron ore price. And BHP has that other little bit of diversification. I think that's the best one out of the bunch.

Banks: Bullish, Neutral or Bearish?

Vishal Teckchandani: Now let's hone in on the major banks and I'll turn back to you Jun Bei. So tough year for the major banks last year. Royal commission, a lot of them ended up slashing their dividends. Going to 2020 is there value? Are you bullish or bearish on the sector?

Jun Bei Liu: Can I go neutral? Look, I think the sector itself, it significantly underperformed the market and what it offers at this point, the dividend itself, actually looks to make them look pretty attractive relative to the market. Interest rates are going lower around the world. Where are you going to get those yields? Yes, earnings growth is going to be very challenging, but at least their capital position looks quite reasonable at this point given the changes given the capital raising.

So I think the major banks look quite reasonable at this point. Now, Commonwealth Bank of Australia (ASX:CBA) has outperformed significantly because better of its better capital position, it’s more defensive. But it does make other banks look very cheap with very high yields on offer.

For income: I think the sector looks pretty good and in a portfolio you do need income and they provide pretty good income together with the resources sector as well. At this point I actually want to pick National Australia Bank (ASX:NAB) and Australia and New Zealand Banking Group (ASX:ANZ). I think both of them look good value, with very high yields. And the capital position looks pretty strong.

Matt Williams: If I could say ditto, can I say that? Because I think Jun Bei's hit the nail on the head. I think they've had the worst of times, the banks. But you can see CBA has laid the groundwork, you can see what happens when they come out the other side. I mean CBA has had quite a remarkable performance at nearly $85, now the shares. So, CBA, you can see what can happen with just a bit of clear air, a new management at the top.

And so for that reason, I'm going to go really against the grain and pick Westpac (ASX:WBC). I think it is right in the firestorm at the moment. Pardon the pun right now. But it's poised for when it comes out to have much better performance. But we've got a bit of time to go. New CEO, new chairman. The new chairman has been picked but the new CEO hasn't yet. But I think I'd prefer the big banks, the CBA and the Westpac. I think their scale is, as things are tougher, I think you need that scale too. You've got more levers at your disposal to invest etc. So hence Westpac's my pick.

In terms of a sector positioning perspective, I'm moving a bit higher in banks but that's still underweight, but that could change as we go forward.

2 other stocks to consider for income

Vishal Teckchandani: Diggers and lenders aside, let's talk about your top income plays for 2020. What's that one income stock you want to own?

Jun Bei Liu: I never thought I'd say this, but I think Telstra (ASX:TLS) at this point looks very interesting. Over the years investors just shunned this stock because of earnings continuously going backwards and because of NBN and all the changes. It does seem like the competition, the big driver of this company has been the mobile space and there seems to be more rationality in that space.

The three key competitors all put up their prices and that does seem to be a turning point for a company such as Telstra. We also have this catalyst of potentially spinning out its infrastructure side of the business and that could be very value accretive. So, on these prices it's not expensive, earnings possibly have found some sort of base and then with a positive catalyst to come through, I think that looks pretty good for now.

Matt Williams: Well, I'm going to go a bit down the market cap scale and it's, look, it's not without its risks, but there's a company called Smartgroup (ASX:SIQ) that's involved in car novated leasing and salary packaging. And it had a year to forget last year, some through its own fault and some through market forces.

But the fact is the company has a pretty good position in its market. It's debt-free. It paid a special dividend last year. At this point it's on track to pay a yield of six and a half per cent fully franked with the potential for another special dividend, which would take it closer to 10% plus the franking.

So look, as I said, not without risks, but it's really been beaten up. But I do like that balance sheet. I do like its market position, and if things just go a little bit better for it, that yield is pretty attractive.

Miners versus banks - Dividend growth over time (AU$m)

Source: Livewire Markets & company annual reports. BHP, RIO, and FMG report in USD, figures have been adjusted to AUD on a constant currency basis. *FY18 data used for Rio Tinto as FY19 annual report not yet available.

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