The ‘dividend drought’ has broken, according to Tyndall Asset Management, with the outlook for dividend income expected to stand at 3.7% in 2021.
The firm said these potential figures compared to returns of yields of 1.8% for 10-year government bonds.
Dividends were particularly improving in the resources space compared to pre-COVID levels where earnings expectations were 32% higher than before COVID-19, driven by a rally in the iron ore price. Resources companies made up around one-third of ASX 200 dividends.
Malcolm Whitten, portfolio manager at Tyndall, said: “The outlook for equity market dividend income looks balanced and attractive at the current level of 3.7%. The rapid and deep cuts to dividend payout in response to the crisis leave good scope for future dividend payout recovery. This sets a positive outlook for future equity portfolio income generation.
“Earnings expectations have risen and just eclipsed their pre-COVID-19 level. The recovery was due to emerging optimism regarding vaccine candidates, clarity regarding the US election result with victory to President Biden with a clear majority, and a growing recognition of the success in health and economic policy packages in containing the virus and economic effects of the shutdown.”
However, possible challenges arose from vaccination delays, new virus outbreaks and policy stimulus withdrawals impacting growth which had led the portfolio to reduce risks.
The Nikko AM Australian Share Income fund rotated out of Commonwealth Bank, which it thought was expensive, reduced Wesfarmers and Woolworths, and spread risk across three names in the insurance space.
Whitten said: “[We made] a rotation within our insurance positions to better reflect our assessed valuation and spread risk over three names: Insurance Australia Group, QBE Insurance Group and Suncorp Group rather than just Suncorp. Although the current yields are lower, the valuation gaps are greater. Each should benefit from higher investment returns on capital reserves”.
The Nikko AM Australian Share Income fund returned 37.6% over one year to 31 March, 2021, according to FE Analytics, versus returns by the Australian equity income sector of 34% within the Australian Core Strategies universe.
