Recent sharemarket conditions have not been overly favourable for income investors. Yet, among low-interest rates and waves of market volatility, dividend shares offer a glimmer of hope.
Dividend shares can offer investors a reliable source of passive income and act as a secure foundation to a considered portfolio. The trick is selecting good quality shares that are suited to your risk tolerance and investing goals.
As we move past sharemarket weakness in September, now is a good time to find some dazzling dividend shares that could be the crown jewel of a savvy, income-focused portfolio.
Reporting season is make or break time for dividend shares. The amount payable to investors is announced during reporting and is usually a percentage of a company’s earnings (also called the dividend payout ratio). Usually, the better the company performs, the better the dividends.
Each dividend has a record date, ex-dividend date and date payable. Dividends are commonly paid out after February half-year results and August full-year results. This is one of the reasons September is traditionally the worst month for equities as dividends are paid out. Additionally, as the third quarter comes to an end, investors historically rebalance their portfolios.
The 2021 August reporting season was positive, rounding out another bumpy year for local and international markets. Many companies beat market expectations for their earnings and delivered great results for investors. The share price of many out-performers rallied in response to the positive news.
[Editor’s note: Do not read the following commentary as recommendations on stocks or dividends. Do further research of your own or talk to a licensed financial adviser before acting on themes in this article].
Dividend heavyweights in the financials sector stood their ground, with the likes of Commonwealth Bank of Australia (ASX: CBA) providing sizeable dividends for investors. A 19% jump in profit to $8.8 billion in the 2021 financial year meant CBA announced a $2.00 final dividend - more than double the $0.98 per share from the same time last year.
Suncorp (ASX: SUN) investors also had more to smile about as the Queensland-based bank declared a 40 cents dividend, plus an additional special 8 cents per share dividend and a $250 million share buyback.
These two examples go to prove the importance of selecting quality shares with strong fundamentals during times of uncertainty as they can help safeguard capital and generate income even in a low-yield environment.
A few themes are lingering after the recent reporting season. Mainly, investors are wary of Coronavirus curve balls that continue to affect recovery efforts in the market and the economy.
For income investors, it’s a good time to look under the hood and examine how a company has performed through the pandemic to date. There is often a lot to digest but look for strong repeatable cashflows, growing revenue and dividends over time, as these indicate a solid financial foundation.
It is also worth considering the outlook and guidance section of the company’s results, as this can provide insight into the company’s future trajectory.
Income investors should also consider dividend shares that will benefit from recovering or growing industries. Examples are financials, which Bell Direct expects to be a source of light in 2022 and offer some of the highest dividends, and building material companies.
If stock picking is not for you, consider Exchange Traded Funds (ETFs) that are focused on dividends. Examples include the BetaShares Global Banks ETF (ASX: BNKS), VanEck Australian Banks ETF (ASX: MVB) and Vanguard Australian Shares High Yield ETF (ASX: VHY):
[Editor’s note: ETFs can also fall in value if shares in an underlying index, on which the ETF is based, decline in value].
Income investing - like all investments - has risks. The biggest concern for income investing is the temptation to chase high dividend yields. You can easily get stung by broker fees if you switch your bet too often, or you might not do enough research before committing your funds to a share.
Dividend shares are also affected by interest rates. Dividends are attractive to income investors while the cash rate is low, but when the Reserve Bank changes gears to increase interest rates, dividends may lose some of their shine as investors look to lower-risk forms of income such as term deposits or bonds. The overall share price may therefore take a hit, reducing dividends as a result. Keep in mind that traditionally when interest rates rise, banks make more money, and their shares can potentially rise over time.
Consistency is key - meaning you should look out for shares that have delivered consistent dividends and overall performance. Typically, companies with growing earnings and cashflow generally also see share price growth, outperform the market over time and offer patient investors great income over the period of their investment.
Savvy investors who take the time to assess their options when it comes to dividend shares have a lot to gain. Providing income and a sturdy addition to a portfolio, dividend shares truly take the income crown.