Income investors are looking everywhere for a safe haven these days.
There was a flood of money into CSL Ltd [ASX:CSL] shares when the coronavirus pandemic reached Australian shores.
Indeed, CSL now has a larger market cap than CBA.
Thing is, CSL’s dividend yield stands at less than 1% after a huge run up the charts.
And there’s been plenty of talk about bank dividends being slashed after APRA changes to capital ratios.
The AFR recently said Citi think bank stock dividends may go ahead in May if they can prove to APRA that they hold up to stress tests.
These are the measures the prudential regulator uses to see if banks can handle big shocks to the economy.
Morgan’s is tipping no dividends and AMP thinks you will see a 50% cut.
By the way, bank shares have been disappointing for a number of years now from a ‘real return’ perspective according to Vern Gowdie, one of our editors at Rum Rebellion.
Find out which five shares he thinks you should consider selling today, in his special report here.
His risk/reward approach to the share market is unique, and he was the only one in our office who nailed it calling the crash in 2020, so he’s well worth listening to.
And regardless of what you think the Big Four will do with their dividends, the writing may be on the wall for the share prices of Westpac Banking Corporation [ASX:WBC], National Australia Bank Ltd [ASX:NAB] and Australia and New Zealand Banking Group Ltd [ASX:ANZ].
Even the CBA share price is not immune.
With this lot, it’s fair to say they’d be lucky to go sideways for the next year, given what we’ve seen so far.
If it’s not the banks then, what about the big mining companies?
I’m talking about BHP Group Ltd [ASX:BHP], Rio Tinto Ltd [ASX:RIO] and Fortescue Metals Group Ltd [ASX:FMG].
What follows is a quick look at what could be around the corner for these three ASX dividend stocks.
The charts, dividend yields and the macroeconomic picture, ie: China
Below you can see the FMG share price (red) has held up much better than the BHP share price (blue) and the RIO share price (yellow):
A strong correlation, and a divergence from about August/September.
Why is this you ask?
Well, FMG is a pure-play iron ore miner and Rio Tinto and BHP Group’s portfolio of mines span a larger range of commodities.
Also, FMG works exclusively in Australia, while BHP and Rio have mines around the world.
So there are a number of factors, political risk and the varying fortunes of the non-iron ore products to name a few.
I called a long-term top on the FMG share price back in February as well, and I stick to that thesis.
FMG’s current dividend yield stands at around 8.7%, BHP’s is around 6.7% and Rio’s is hovering around 7.3%
These sound great, but dividend yields look backwards — what these companies did before.
And I suspect that when their next earnings come out, we’ll get a much better grip on the impact of COVID-19 on these big mining stocks.
The macroeconomic picture is not clouded, it’s opaque.
No one knows if China will be able to get back up and running, like they have suggested they will.
It’s a three-step process, and you’d better doubt the third step
Remember, these three mining giants rely on Chinese consumption of their products. In order to maintain their current dividend yields this trio would need to maintain earnings.
They could increase the dividend payout ratio, but this would potentially hurt future earnings.
Mining capex in Australia is in a well-documented decline anyway:
Trump is publicly questioning the number of cases in China, and it feels like the current reopening of the country is a public relations exercise more than anything.
China must think the perceived strength of their economy is as good as actual strength.
Beyond this, China must then ship the finished products they make to the rest of the world.
It’s a three-step process for these companies:
- Raw materials get sold to China.
- China makes the finished product (white goods, steel etc).
- China then ships the product to the West.
If you doubt number 2, you may be wrong or right, depending on the veracity of the claims coming out of the country.
Surely you must doubt number 3 is possible as Western economies are far more transparent.
And the signs are all negative.
At some point you must imagine this must flow through to the dividend payouts of these companies.
So don’t hold your breath on any juicy dividends. You may wind up sorely disappointed.
For The Rum Rebellion