Earnings of Australian companies have taken a material hit during the COVID-19 pandemic, putting pressure on dividend yields.
Since the start of the year, the ASX 200 has fallen 14% and as a result, many companies have decided to defer or cancel their dividends in order to preserve cash.
The likelihood of dividends being paid out in the future was also company-specific with Qantas seeing its revenue fall to almost zero while Woolworths was likely to experience revenue growth.
Dividend Risk Levels Across Sectors
In order to enhance their income yields, Zenith Investment Partners suggested three strategies.
The first was avoidance of companies with dividend concerns and only focusing on those companies with strong balance sheets and revenue/earnings forecasts which should anticipate their dividend-paying ability.
Secondly, adopting a dividend-rotation technique which took advantage of dividends being paid at different points in the year. This technique involved rotating in and out of dividend-paying companies throughout the year around ex-dividend dates and holding the position for at least 45 days to gain an entitlement to franking credits.
Finally, active managers could use options strategies to generate income through selling call options on stocks they held as an option’s value increased as the underlying stock volatility increased. This meant selling options in volatile markets could generate greater levels of income generation.