Inflation erodes bank deposit rates, investors look to reliable dividends
As inflation rates rise, investors may find more value in reliable dividends from industrial stocks.
While bank deposit rates of up to 5% are welcome news to investors accustomed to derisory returns, rampaging inflation means that decent reliable dividends are more valuable than ever.
The risk-free 5% return quickly gets eroded by inflation which is running at an annualised rate of more than 7%, while the taxman wants his share of the interest as well.
In contrast, there are plenty of industrial stocks yielding in the high single digits and paying fully franked dividends. Even higher returns are possible in the resources sector – Woodside Energy (ASX: WDS) is on a circa 11% yield for example – but the commodities cycle means dividends are inherently unreliable.
The banks continue to hold enduring appeal as income stocks and they tend to benefit from higher rates because of expanded lending margins. But if there’s a bad debt apocalypse, the lure will quickly evaporate.
Is it time to look elsewhere?
In mid cap territory, salary packager/novated leaser McMillan Shakespeare (ASX: MMS) upped its half-year payout a lusty 70% to $0.58, which equates to an annualised yield of 8.8%.
Small cap kitchen appliances and Casio watch franchisee Shriro Holdings (ASX: SHM) reduced its half year dividend to $0.035, from $0.06 previously as net profit slunk 23% to $6.3 million.
Shriro had a tough year, partly because the cool summer reduced demand for its signature Everdure by Heston barbeques. It was also agent for the Blanco cooking brand, but lost this right after Blanco took over its own distribution.
As with so many other consumer-facing stocks, Shriro shares have stumbled: down 25% over the last year. That means despite the trimmed dividend, the company still yields more than 9%, fully franked.
Management notes that over seven years Shriro consistently paid a dividend, averaging $0.091 per share per annum.
Other gems revving up their dividends are jeweller Michael Hill (ASX: MHJ) and Motorcycle Holdings (ASX: MTO) which yield more than 8% along with mining services provider Lycopodium (ASX: LYL).
High yields from listed investment companies
For those who like to spread their bets, several listed investment companies (LICs) are high yielders. Steered by franking credits crusader Geoff Wilson, WAM Capital (ASX: WAM) yields more than 9% – fully franked of course.
Thanks to its holdings in stocks such as the recovering Myer Holdings (MYR) and NZ-based, Resmed mini-me Fisher & Paykel Healthcare (FPH), WAM’s portfolio grew just over 15% for the year to 31 January 2023, compared with a 6.6% gain for the small ordinaries accumulation index.
Since its inception in 1999, WAM has returned 14.8% compared with 5.1% and 8.2% for the small ordinaries and all ordinaries accumulation indices, respectively.
The fund kept its half-year payout steady at $0.775 per share, equating to a full-year yield of around 9%. Once again, the yield is accentuated by WAM’s share price, down 23% over the last 12 months.
Elsewhere in small cap LIC-ville, Sandon Capital Investment (ASX: SNC), Acorn Capital (ASX: ACQ) and Cadence Capital (ASX: CDM) all yield more than 8%.
Sandon maintained its half-year payout at $0.0275, despite its investment portfolio shrinking a “disappointing” 3.1%. The managers add that as far as its constituent stocks go, only a “small majority” performed poorly, with the portfolio diminution more reflecting waning investor sentiment.
After paying the dividend Sandon will have a profit reserve of $0.243 and a franking reserve of $0.074, implying more dividend goodies to come.
Acorn Capital declared a $0.0425 cent interim dividend – in line with last year’s final dividend – despite net profit eroding 66% to $3.18 million.
In February, management said it will pay out any excess franking credits as a special dividend – a policy expected to be emulated given the federal government’s mooted crackdown on such manoeuvres.
With the exception of McMillan Shakespeare and Michael Hill, all the stocks mentioned are trading with the entitlement to the declared payout (cum dividend). Westpac (ASX: WBC), the National Australia Bank (ASX: NAB) and the ANZ Bank (ASX: ANZ) have March balance dates and typically pay their dividends in June or July.