In a recent article I assessed the feasibility of retiring off the income generated by a share portfolio. Based on the feedback that I received from readers I’ve explored the heavily concentrated Aussie market where around 60% of the income generated by the 200 companies within the ASX 200 come from 10 shares.

The prospects for income investors who hold the ASX 200 and the individual companies that generate much of the index income are based on the future dividend payments from these companies. For the countless retirees who wrote me with stories of how their retirements are funded by dividend payments this exercise is far from theoretical and will impact their day-to-day lifestyle.

Our analysts project future dividends for each company they cover. Those estimates provide the opportunity to explore the estimated forward dividends for the ten biggest contributors to income generated from the ASX 200. In part one I explored the first five names on the list: BHP (ASX: BHP), CBA (ASX: CBA), Rio Tinto (ASX: RIO), National Australian Bank (ASX: NAB) and Woodside (ASX: WDS). This article will explore the remaining companies.

The following chart shows the top 10 contributors to overall ASX 200 dividends with their current yield, the growth in dividends since 2013 and our analyst’s view on projected growth over the next 5 years. This is followed by commentary on the 5 members of the list that I did not cover last week.

Dividend growth prospects

Fortescue (ASX: FMG)

Fortescue benefited substantially from the surge in Iron Ore prices after COVID which led to a hefty dividend in fiscal 2021 of $3.58. Lately the dividend picture has been less positive although Fortescue has had strong growth in the dividend since 2013 due to large increases in iron ore production. During that period the dividend has grown at a CAGR of just over 25%.

Going forward Mills expects conditions for Fortescue to continue to be less favourable which will led to continued reductions in the dividend. The company has a large exposure to China’s troubled real estate sector, given that almost all its iron ore is sold to customers in China.

Over the next 5 years Mills expects the dividend to drop significantly. However, if iron ore prices rise it could be good news for income investors. Mills notes that Fortescue is increasingly focused on the dividends and a focus on debt reduction and cost reductions have resulted in a sound balance sheet.

ANZ (ASX: ANZ) 

The outlook for ANZ’s dividend is more positive. The bank is in sound capital position with $3.5 billion in surplus capital which is at the top end of ANZ’s target range. Morningstar analyst Nathan Zaia expects average earnings per share growth of 2.8% a year over the next 5 years assuming a payout ratio of around 65%. This surpasses the less than 1% CAGR since 2013.

CEO Shayne Elliot took the helm in 2016 and changed strategy, simplified the bank, and revamped senior management. The focus on retail, commercial, and institutional banking is expected to improve earnings over the long term with less emphasis on the "super regional" Asia strategy.

Zaia believes that fundamentally ANZ Group remains in good shape and in the long term, we expect will produce solid profit growth broadly in line with growth in the economy.

When it comes to shareholder distributions, Zaia thinks ANZ Group has set an appropriate dividend payout range considering the capital position, outlook for loan growth, M&A opportunities, and loan-loss provisions.

Westpac (ASX: WBC)

Westpac is in a similar position to other members of the big 4 banks but historically the bank has performed poorly in terms of dividend growth. Since 2013 dividends have dropped at more than 2.5% annually.

Similar to NAB, Westpac used COVID as an opportunity to reset shareholder expectations and dial back a dividend payout ratio that Zaia described as aggressive.

Westpac paid out too much of earnings and subsequently required equity raisings. The bank continued to maintain a dividend in dollar terms, while the payout ratio rose to an unmaintainable 90%. Management and the board aimed to look through “one-off” costs. The problem was that one-offs kept coming. In the last five years Westpac’s shares on issue increased around 10%.

Over the next 5 years Zaia expects dividends to grow at a CAGR of 3.7%.

Macquarie (ASX: MQG)

Macquarie’s dividend track record is impressive with steady growth in the dividend with the exception of 2020. Since 2013 dividends have grown at a CAGR of close to 13%/.

Morningstar analyst Nathan Zaia expects continued growth over the next 5 years albeit at slower pace than historically. He is projecting a dividend CAGR at 2.75%.

Macquarie has typically paid out around 70% of earnings as dividends, within the companies the annual dividend payout ratio. In fiscal 2020 and 2021 the dividend payout ratio was around 55%, with management showing a willingness to lower the dividend to preserve capital when uncertainty is high, and ensure the group can capitalise on opportunistic investments. Zaia believes this is the right thing to do as it reduces the likelihood of a dilutive equity raising. Something both NAB and Westpac failed to do.

If you are looking for income from an ETF listen to our Investing Compass episode on Morningstar's favourite income ETF. 

Wesfarmers (ASX: WES)

Wesfarmers’ dividend growth since 2013 has been less than 0.50% per year. However, Morningstar analyst Johannes Faul expects growth to pick up over the next 5 years. He projects growth of just under 9% per year going forward.

Wesfarmers possesses many positive attributes of a strong dividend payer. Faul has awarded Wesfarmers an Exemplary capital allocation rating. The balance sheet is in a strong position, investments have a track record of generating significant economic profits for shareholders and distributions to shareholders are at appropriate levels.

Faul believes distributions to shareholders have largely been appropriate with Wesfarmers consistently paying a high percentage of underlying earnings to shareholders and returning excess capital through special dividends.

He also believes the company is in good shape if the economy heads south. The entrenched nature of Wesfarmers’ retail key brands, diverse portfolio, and strength of the balance sheet means the conglomerate is in a strong position to weather a prolonged downturn in the broader economy with relatively little potential for financial difficulties.

Final thoughts

Many investors are tempted by high yields and fully franked dividends. These can be positive traits for an investment. However, relying solely on high yields as a deciding factor for an investment can cause an investor to fall victim to a dividend trap. This is a topic I covered in an article on the biggest mistakes income investors can make.

A dividend trap is not the only pitfall for an income investor. A lack of dividend growth can also be an issue. For younger investors poor dividend growth prospects may detract from building a meaningful passive income stream. For older or retired investors, a lack of growth may mean deteriorating standards of living if inflation surpasses dividend growth.

Investors looking for growth may want to consider moving away from the largest ASX companies with high yields and consider other opportunities including smaller ASX listed opportunities and global shares.

For more resources on income investing please see the following articles: