The outlook for ASX dividends in FY 2024

Over the past three decades, Australian stocks have proved an exceptional source of income for investors, and in particular retirees thanks to the added benefits of franking credits.

In more recent years it’s certainly been an interesting ride for dividend investors. Since the tumultuous COVID-19 period in FY21 when the ASX 200 yielded just 2.9% cash and 1.0% franking, there has been a sharp rebound.

In FY22, investors received 5% gross income including cash and franking. In FY23 it was 6.1% plus some big bonuses including off market buybacks from Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), Woolworths (ASX: WOW), and JB Hi-Fi (ASX: JBH), along with special dividends including BHP Group's (ASX: BHP) significant distribution of Woodside Energy (ASX: WDS) shares which came in the form of a fully franked dividend.

So, what’s next?

After this volatile period, we project a normalisation in the environment for Australian dividend income.

Where to look for stronger dividends in the year ahead

As we move into FY24, investors find themselves navigating one of more complex investing environments in recent times. There so much focus on the RBA’s next move, concerns about increasing pressure on consumer spending, a heightened level of geopolitical uncertainty, and the elephant in the room – inflation.

While equities will continue to be a pilar of strength in income generating portfolios, investors must navigate increasing divergences in payouts within and across sectors, meaning active management of portfolios to capture the best dividends will be critical.

Here’s a look at three key sectors.

Financials

Recently we’ve seen some disappointing results from the Big 4 banks, with net interest margins dropping after intense competition including cashback offers, as well as some concern about the outlook for the housing market and pressure on households from the closely watched ‘mortgage cliff’.

Despite this, the banks have generally increased dividends as their balance sheets are strong, but perhaps not as much as some investors were hoping for.

Banks will remain a source of sound yield in diversified income portfolios, however we are not anticipating strong dividend growth from the banks in the foreseeable future. The bank we have the highest conviction in for dividends in the year ahead is Macquarie Group (ASX: MQG).

Insurance stocks, on the other hand, look to have a stronger case for strengthening dividends in the year ahead. We think yields can improve after a recent period of weakness when their balance sheets suffered from high claims. There has recently been widespread premium rate increases and insurers usually perform better in a more normalised non-La Nina climate period.

The mining and energy sectors

As many of our Unit Trust clients and Plato Income Maximiser Limited (ASX: PL8) shareholders will know, we have been big beneficiaries of record dividends, special dividends, and franking credits from mining stocks in recent years.

Is it time to cut and run? Well unfortunately that’s what too many investors I speak to have done – anticipating the crash of Iron Ore prices and other headwinds. But it’s easy to overlook how diversified many of Australia’s great mining businesses are.

Take BHP (ASX: BHP) for example. In FY22, it posted net profits of US$22.4 billion. That was up 64% on 2021 when many said sell because they tipped it was the top of the iron ore cycle. But last year, it was coal that provided a windfall, generating about US$9.5 billion for the company.

While it’s true dividends from big miners can be heavily influenced by the iron ore price, this in itself, can be dependent by the at-times unpredictable shape of China's economy. At the time of writing, we think there are good signals emerging from China. Unlike the monetary policy tightening in the west, China has the firepower to continue to stimulate its post-locked down economy, and inflation remains low.

So, generally we’re once again cautiously positive on mining dividends for the year ahead, after we saw some falls in the second half of 2022 from a high base.

When it comes to the energy sector, this is another area we’re cautiously positive on and a sector that will be very important in dividend portfolios in the year ahead.

The recent strength in gas and coal prices should support strong yields, however capital expenditure is something to watch as this naturally puts pressure on the level of cash companies pay out.

Woodside Energy (ASX: WDS) is one name that remains a Plato top ten holding,

Consumer stocks

This is one part of the market where investors must do their homework, however, dividends will be ripe for the picking if you know where to look. Across the sector, we’re cautious that some companies have seen sales starting drop as inflation and higher mortgage repayments take their toll on household budgets.

Dividend investors can have more confidence in strong consumer staples businesses. Woolworths (ASX: WOW), for example, which is another Plato top 10 holding, recently said its seeing evidence of food inflation moderating and noted supplier price increases were stabilising.

Finally, we think the prospect of good dividends from telcos looks to be improving with a more rational pricing environment. Are we about to see Telstra's (ASX: TLS) return to dividend darling status? Time will tell.

Unlocking stronger dividend income

At an index level, Plato Investment Management is projecting the ASX 200 to generate 5.5-6% yield including cash dividends and franking credits in FY24.

However, we reiterate, with astute stock selection that avoids dividend traps, along with active and tax effective portfolio management, investors should be able to generate considerable additional income on top of the index level yield.

And remember there only one free lunch when it comes to income – diversification!

Through a diversified and highly active portfolio of Australian equities, Plato has delivered income (including franking credits) of 9.7% per annum (after applicable fees and taxes) since inception in September 2011.

Please Note: Everyone’s circumstances are different. This article contains general information only, and you should seek professional advice before making any financial decisions. Stock commentary is illustrative only and not a recommendation to buy, hold or sell any security.

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