9 high quality dividend ideas for 2022
These stocks combine high dividend yields with economic moats.
Mentioned: AGL Energy Ltd (AGL), ANZ Group Holdings Ltd (ANZ), Aurizon Holdings Ltd (AZJ), Fortescue Ltd (FMG), Magellan Financial Group Ltd (MFG), Spark New Zealand Ltd (SPK), Westpac Banking Corp (WBC)
A slew of asset managers and Australia’s oldest company are among the nine stocks Morningstar analysts forecast to deliver dividend yields above 5% this financial year.
Fund manager Pendal Group (ASX: PDL) tops the list of income stocks with a 2022 dividend yield of 7.4%. It’s followed closely by fellow active manager Magellan Financial Group (ASX: MFG) at 6.8%, while power generator and retailer AGL Energy (ASX: AGL) is expected to yield 6.1%.
All three companies boast sound balance sheets, say Morningstar’s analysts, who believe the current dividend policies are appropriate.
Morningstar analysts forecast the dividend yield for companies under coverage three years in advance. We’ve screened our database for those names our analysts believe will deliver strong dividend yields in the 2022 financial year.
More than half of the nine are trading below their Morningstar fair value and are forecast to deliver long-term share price appreciation. Australia’s largest rail freight operator Aurizon Holdings (ASX: AZJ) is expected to hit a 6% dividend yield in 2022 and is trading at a 25% discount to fair value.
Aurizon has committed to to paying out 100% of profits as dividends. Morningstar senior equity analyst Adrian Atkins says this is appropriate given the firm’s reasonable balance sheet and limited need for investment.
All nine companies have economics moats, which Morningstar awards to quality companies it believes have ten to twenty years of competitive advantage.
A moat is an indicator of quality and helps investors avoid dividend or value traps, says Morningstar equity strategy Gareth James. These are cases where companies pay dividends they cannot afford to sustain. In time, profits may fall, dividends get cut and the share price declines.
“Narrow- and wide-moat-rated companies are more likely to sustain profits and therefore dividends than companies with no economic moat,” says James.
Note high dividend yields can mask a plummeting stock price. Dividend yield measures income paid out relative to the share price and as prices fall, yields rise.
Fortescue Metals (ASX: FMG) twelve-month dividend yield jumped from 9.9% in July to 23.9% in September as the share price dropped more than a third.
In a nod to reliability, the 2022 forecasts are broadly in line with the average dividend yield over the last five years. Narrow moat telecommunication company Spark New Zealand (ASX: SPK) is expected to pay out a 5.5% dividend yield next year, versus the 6.18% it has averaged since 2016.
Morningstar director of equity research Brian Han says management’s current approach to dividends is appropriate given the group’s strong balance sheet.
The two wide-moat names on the list are big banks Westpac (ASX: WBC) and Australia and New Zealand Bank (ASX: ANZ). They are forecast to have dividend yields of 5.5% and 5.2%, respectively in 2022.
Westpac’s dividends are on a more sustainable footing now, says Morningstar equity analyst Nathan Zaia. Prior to the pandemic the bank paid out too much of its profit and had to raise money in share markets.
“We think Westpac has set an appropriate dividend payout range,” says Zaia.
“Covid-19 was a good opportunity for the bank to reset shareholder expectations and we trust it won’t revert to its old aggressive payout ratios.”
Westpac is the cheapest of the big four banks and the only one to trade at a discount to fair value. It closed Friday at $21.08, a 27% discount to the $29 fair value.