After the slim years of the pandemic, analysts expect a strong economic recovery and buoyant commodity prices to help dividends extend their rebound into 2022.

Dividends are tipped to rise thanks to a double act: Company earnings are primed for growth thanks a booming economy set to increase at one of the fastest clips in decades and robust commodity prices. Rising confidence that the worst of the pandemic is behind us should see payout ratios rise and a greater share of those profits returned to shareholders.

“The short answer is we see it as a good year for dividends,” says Michael Price, an equity income portfolio manager at Ausbil.

“We see profits hitting a record high and dividends coming along with that… Both banks and resources should have some good news for dividends and there is still some potential for special dividends and buybacks as balance sheets seem to be repaired post the pandemic.”

Price expects the dividend yield for the S&P/ASX 200 to hover around 4% before franking credits, versus the 3.6% posted by the index in 2021. His figures are in line with the forecasts from Jason Lye, a senior portfolio manager at First Sentier, who predicts yields of 3.6% for the larger S&P/ASX 300 index, rising to 4.8% once franking credits are included.

Dividend yield is a ratio of cash paid out to investors relative to the share price.

Strong growth locally and abroad will buoy a raft of sectors, with banking, resources and energy in the spotlight. The Reserve Bank is forecasting GDP growth to hit 5.5% this year, the highest jump since 1994 after the 9.5% posted in the June quarter 2021. Economic reopening overseas and supply problems should help commodity prices, which hover at or near multi-year records for oil and copper.

Growing profits, stronger balance sheets and better returns on equity should also give corporate Australia the confidence to raise payout ratios, says Lye. Payout ratios are the proportion of earnings paid as dividends.

Consensus forecasts expect payout ratios to hit 67%, just short of last decade’s range of 70% to 75%.

Dividends are retracing their steps to pre-pandemic levels after the virus decimated payouts as corporates hoarded cash in expectation of leaner times. Commonwealth bank (ASX: CBA) cut its dividend for the first time in more than a decade in August 2020 while NAB (ASX: NAB) raised $3.5 billion in capital.

Dividends fell 35% in FY2020, says Lye. This year’s jump will take payout levels and dividends close but not quite to pre-pandemic levels.

“Since then, earnings have pretty much rebounded to pre-covid levels. Payout ratios are a bit below their historic levels,” he says.

Banks, miners and energy

Financial services will drive a large chunk of the largesse. Lye and Price expect bank profits to grow as the economy recovers. Excess capital put aside during the pandemic should also supplement the cash being returned to shareholders.

Economic growth will come up against tighter margins at the banks, says Morningstar senior equity analyst Nathan Zaia, who expects modestly higher dividends. A roaring economy means more loans, but a flat cash rate and fierce competition will limit how much banks can charge for those new loans and keep profit margins tight, he says.

“GDP growth is obviously very good for banks in terms of demand for credit, helping people stay employed and able to repay their loans, meaning lower defaults,” he says.

“But I don’t think it necessarily helps the margin pressure that is continuing until cash rates are increased.”

The Reserve Bank remains committed to low rates, with Governor Philip Lowe implying the bank is unlikely to raise rates until 2023 in his latest monetary policy statement, published in December.

Morningstar forecasts a FY 2022 dividend yield of 4% for Commonwealth Bank, 4.5% for NAB, 5% for ANZ (ASX: ANZ) and 5.6% for Westpac (ASX: WBC), the only major lender trading at a discount to fair value.

Australia’s miners will struggle to repeat last year’s “tsunami of dividends”, says Lye but iron ore miners remain cashed up even with prices sitting roughly US$100 below their 2021 peak. Earnings should also benefit as prices rebound after last year’s rout, rising from a low of US$92 set in November to close above US$130 on Wednesday.

Higher prices for other commodities such as copper and coal partially offset lower iron ore prices at diversified miners Rio Tinto (ASX: RIO) and BHP (ASX: RIO). Coal and copper prices are moving higher as demand from the post-covid economic reopening runs up against supply shortages. Copper prices remain more than 60% above pre-pandemic levels.

“Cash flow generation out of the large cap mining space has been very strong and therefore we’re going to see strong capital returns especially in form of dividends,’ says Luke Smith a portfolio manager at Ausbil.

Morningstar forecasts a FY 2022 dividend yield of 11.6% for BHP and 11.4% for Rio Tinto.

Analysts also tipped higher dividends from the energy sector thanks to elevated oil and gas prices worldwide. Investors received advanced notice on Thursday when Woodside Petroleum reported an 86% jump in Q4 revenue versus the previous quarter, helped by a 53% jump in prices fetched for its oil and gas.

The global benchmark Brent crude oil crossed US$87 a barrel on Tuesday, hitting a seven-year high.