It’s raining dividends as companies shower Australian investors with billions in the latest reporting season. Yet the green shoots of an earnings recovery could prove short lived, analysts warn.

More than $40 billion in dividends, together with $15 billion in buybacks and $34 billion of cash takeovers have added to a record haul for investors. This was nearly double the $20.6 billion paid in dividends a year earlier.

Aggregate dividends rose by 70 per cent among S&P/ASX200 companies, with almost 60 per cent increasing dividend payments, according to CommSec.

Among the largest dividend payers, major miner BHP (ASX:BHP) led the way with more than $8 billion, followed by Commonwealth Bank (ASX:CBA) with $3.5 billion, major miner Rio Tinto (ASX:RIO) with $2.8 billion and conglomerate Wesfarmers (ASX:WES) with around $1 billion.

Others to announce better than expected dividends included fast-fashion jewellery retailer Lovisa Holdings (ASX:LOV), gold miner Newcrest Mining (ASX:NCM) and oil and gas producer Woodside Petroleum (ASX:WPL).

Dividends are back

Source: CommSec

CBA led in buybacks with $6 billion, followed by rival National Australia Bank (ASX:NAB) with $2.5 billion worth and WES with $2.3 billion.

Investors have also benefitted from a wave of takeovers, led by a $5.2 billion takeover of Spark Infrastructure (ASX:SKI). Other offers on the table include a$22.8 billion bid for Sydney Airport (ASX:SYD) and a $3 billion bid for financial services group IRESS (ASX:IRE).

“The sheer amount of cash is mammoth – the largest I have ever seen – that will swamp the Australian market over the coming months,” market strategist Richard Coppleson told the Australian Financial Review.

“If we get a September sell-off, institutional investors and retail investors will be sitting there flush with hordes of cash, just waiting for the right time to pounce.”

The end of August also saw the benchmark S&P/ASX200 index post its eleventh consecutive monthly rise, its longest winning streak ever. With an estimated franked dividend yield of 5 to 6 per cent for fiscal 2022, the Australian share market offers a far higher return for income investors than bank deposits or bonds.

“We have seen green shoots in dividends because the second half of fiscal 2021, the June half, saw earnings growth peak,” said Morningstar’s head of equities research, Peter Warnes.

The strong earnings growth has reflected the buoyancy of household spending and the poor results of fiscal 2020, Warnes notes, pointing to the “unparalleled support and stimulus programs of the Australian government” together with a dividend boom from Australia’s large iron ore miners.

Boosted by high iron ore prices over US$200 a tonne, Australia’s top five exporters have declared nearly $60 billion worth of dividends for the year to June 30. Prices have since eased however to around US$140 a tonne.

“The early signs were there, and fortuitously those positive trends continued,” said Malcolm Whitten, portfolio manager and senior analyst at Tyndall Asset Management.

“Of our portfolio of 45 companies in the Tyndall Australian Share Income Fund, 28 [including ANZ, NAB and WBC half-year dividends] increased their 12-month dividend distribution to shareholders. We’re not necessarily back above where they were in March 2019, but there have definitely been increases above the same period a year earlier,” he said.

Adjust expectations

Nevertheless, Whitten warns that a repetition of such strong performance is unlikely in the year ahead.

“We rebounded as a consequence of the negative market reaction to COVID-19, so that won’t be repeated again this year…We’ll all get vaccinated and get through this, but the impact of the current lockdowns and starting point in terms of valuation must be considered,” he said.

“Total returns will likely be lower and the dividend component will consequently be more important, with a lot of the good news around the reopening to June ’21 already reflected in stock prices.”

Morningstar’s Warnes suggests income-focused investors target defensive stocks with sustainable dividends, such as retailers, banks and utilities.

Among those favoured by Morningstar equity analyst Gareth James are narrow-moat rated rail freight operator Aurizon Holdings (ASX:AZJ), which offers a “generous dividend yield over 7 per cent” for fiscal 2022 and narrow moat-rated gas pipeline company APA Group (ASX:APA), with a high dividend yield of 5.8 per cent.

Others include telco Telstra (ASX:TLS), with a 4.2 per cent dividend yield and medical insurer Medibank Private (ASX:MPL), offering 3.6 per cent, as at August 2.

Income investors could also consider exchange-traded funds (ETFs) or listed investment companies (LICs) to reduce individual company risk. Among the former, dividend-focused ETFs include the bronze-rated Vanguard Australian Shares High Yield ETF(ASX:VHY), while LICs include the bronze-rated Australian Foundation Investment Company (ASX:AFI) and Mirrabooka Investments (ASX:MIR).

However, Warnes says investors need to adjust their expectations to returns of around 3 or 4 per cent amid an expected slowdown in earnings growth in the year ahead. Analysts have already started downgrading fiscal 2022 forecasts, with corporate profits declining amid extended lockdowns and signs of weaker global growth.

Morningstar data also indicates the Australian share market is at least 10 per cent above its fair value estimates.

“Markets do need a breather – the US S&P [index] hasn’t had a 5 per cent pullback this year, it could easily come back by 10 or 15 per cent and we would follow. It’s also important to watch what’s happening in China in terms of their exports and regulatory moves, which could see it slowing,” Warnes said.

“This is not the time to be going further out the risk curve…Let some cash build and opportunities will come your way later this year or early next year, I suspect.”