Tim Richardson

The drop in local dividends has the potential to become more acutely felt as more Australian investors have become ‘over-exposed’ to a small number of sectors, according to Tim Richardson, Investment Specialist at fund manager Pengana Capital Group.

He said the ‘hot’ sectors for dividends on the ASX are now cooling, while overseas dividends delivered record highs for the first quarter of 2023. “While dividend yields now exceed pre-Covid levels, averages can be misleading, and conceal the fact Australian dividends have become concentrated in fewer sectors.

“Australian dividends are experiencing pressure on a few fronts, including interest rates and inflation. Energy prices are drifting lower as the global economy slows, and commodities such as iron ore and coal have fallen, while bank lending margins is also coming under pressure.

“But a bigger concern for Australian income investors is the potential to become over-exposed to a few sectors, including the potential for higher exposure to cyclical industries as the global economy slows.”

Mr Richardson said achieving adequate diversification for income stocks on the ASX had become more challenging in recent years. “Australian dividend stocks have become concentrated, with 80 per cent of dividend income being delivered by stocks in just four sectors.

“This concentration has worked to offset declining dividend yields in other parts of the economy. But it leaves the potential for dividend investors to be under-diversified and more exposed to cyclical stocks including those linked to materials, financials, energy and property.”

He said overseas stocks could provide more diversification, including access to a wider universe of profitable growth stocks in the healthcare, technology, and industrial sectors. Importantly, this could still be achieved with franking credits.

“It is possible to diversify into other markets including income-producing stocks overseas while still retaining franking credits, via the Listed Investment Company structure on the ASX.

“LICs such as Pengana International Equities Limited generate franking credits because they pay taxable income in Australia.”

As at 30 April 2023, Pengana International Equities Limited (ASX: PIA) reported profit and franking reserves (which support a fully franked dividend of 5.4 cents-per-share per annum, paid quarterly) through to the 31 December 2024 dividend, which is payable in March 2025.

When franking credits are included, this equates to an effective dividend yield of approximately 7.4%, based on the 24 May 2023 share price.

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