Imagine building a portfolio, where every month you have dividends coming in. That’s 12 months a year you’re getting paid.
It’s entirely possible to do, as most companies and funds have a dividend schedule which they adhere to each year. And, since they usually follow set payment dates, it allows us to check in the past what date they paid and work backwards from there.
In today’s harsh economic conditions, the good times are drying up, and dividends are on the chopping block. Retirees or income investors want stability with their dividends, and why wouldn’t they? The cash flow circumstances we either have on the horizon or, have planned, determines how we live our lives.
I searched for 6 companies which, in my opinion, have robust prospects for the current climate. Some of these payments double up in the same month as they pay 4 times a year, this means some months will have bigger payouts.
I have also had to put an ETF in there to reach the goal of income every month (seems to be this pattern of most Australian stocks paying on March and September). In this blog post I’ll be going over each holding and their dividend safety
Quick disclaimer; this isn’t my portfolio; I don’t own any of these stocks or ETF’s. I thought it would be a fun exercise to see which Aussie shares are most likely to keep paying through the tough times and what kind of portfolio this could look like. Remember, past performance is no guarantee of future results… but I like these stocks none the less.
January & July- Vaneck Australian Corporate Bond ETF (PLUS)
Straight off the bat, we have our only ETF. This ETF, with the ticker symbol PLUS, pays 4 times a year, January, April, July and October.
I wasn’t sure about placing an ETF in this portfolio because we’re looking for stability and ETF payments can be lumpy. As an example, they paid 37% less when comparing April 2019 to April 2020 distributions, which was 16 cents per share and 10 cents per share, respectively. I have to admit; it was hard to find dividend payers in January and July that I thought were of good quality.
The strategy of this ETF is to follow the iBoxx AUD Corporates Yield Plus Mid Price Index, now that is quite the mouthful 😳. The indexes strategy, in its purest form, is to buy investment-grade bonds. These investment-grade bonds must make up 80% of the portfolio.
Here are the top 10 holdings of the portfolio as of August 11 2020. Because all these companies are investment grade, it means they have a low probability of going bankrupt. Having a low likelihood of going bankrupt and continuing to meet their interest repayment obligations is what makes these companies investment grade and considered a safe investment.
The theory behind bonds is meant to be consistent income and stability, but less volatility compared to stocks, which worked well in the case of the 2020 crash. During the crash, VAS, the ETF which tracks the ASX300 fell 38% while PLUS only fell 17%.
ETF’s that pay distributions are going to be lumpy, it’s just part of their distribution system. This ETF will continue to pay, how much you’ll receive each payment is hard to say. It’s not going to be as consistent as a stock or LIC.
When a government or corporation issue a bond, they’re obligated to pay the interest repayments, the interest rate on a bond is also known as the coupon rate. In the above image, you can see next to each company a percentage, this is the coupon rate for the bonds they’re holding. So, Mcdonalds is paying 3.8% in interest each year to this fund (since the fund is the bondholder).
Because they’re obligated to pay, and these businesses are investment-grade, you can see how the ETF will receive consistent interest payments which will be passed through to the unitholders of the ETF.
February & August- Waypoint REIT (WPR)
Waypoint is Australia’s largest REIT owning service stations and convenience stores solely. My opinion is during lockdowns, these service stations and conveniences stores should still perform relatively okay. What this means is their rental income won’t be too severely affected, I could be wrong, and we will find out when they release their results for the half-yearly presentation on August 20.
As of their 2019 annual report, Waypoints portfolio consisted of 469 properties with a weighted average lease expiry of 11.7 years and a current occupancy rate of 100%. All great stats for the long-term investor, seeing as this is what makes their profits more reliable as they’ve signed these tenants up to long-term leases. Although anything could happen to these franchisees.
For instance, fewer cars on the road during lockdowns, falling oil prices hurt franchisees profit margins with lower retail petrol prices but higher wholesale prices. If this happens, it will leave little cash left over for expenses (such as lease payments)—all knocking down net income in the interim. During a normal recession, I can see these profits being reasonably protected, and most states aren’t in full lockdown anymore, which makes it still fairly defensive in my opinion.
REITs can sometimes pay out more in dividends then earnings received. This is because they have high depreciation costs which affect earnings; however, cash-flow is fine. Since they pay out more than earnings, the payout ratio can look extremely high. The metric to look for is Adjusted Funds from Operations payout ratio. What I didn’t like about this REIT is in their annual reports, they never mentioned it, I also couldn’t find their deprecation charges. Perhaps it’s my amateur abilities, but I couldn’t their depreciation charges listed.
Unfortunately, I don’t have adjusted funds from operation to go off, and all I can use is their earnings per share for a guide on what they paid out as a dividend. In 2019 they made 16 cents per share and paid out 14 cents per share, giving us an EPS payout ratio of 87%. That’s high, however, REITs have the ability to payout 90% of earnings.
This high payout ratio goes hand in hand with their business model being able to raise rents periodically after locking their tenants into lease contracts; this usually makes REITs have some stability.
It doesn’t always make them stable, I wouldn’t want to own a shopping centre REIT during this pandemic with lockdowns and forced closures of stores. Those earnings are guaranteed to take a hit, Waypoint will record some kind of fall in earnings, pending how bad business became for the petrol stations franchisees. Never the less, I still see large traffic volume back on the road so I suspect their earnings won’t be too damaged.
March & September- Computershare (CPU)
Our first stock in the monthly paying portfolio, I had plenty of options to choose from out of the March- September pay date, but I decided on Computershare (CPU). I could have chosen a LIC or another ETF; however, I wanted some individual companies in here for the stability of consistent profits. The truth of it is, it was tough to find a business paying dividends that aren’t taking a hit, but I’ve given it a try so here goes.
Computershare’s core business is a diversified share registration business. They provide multiple other services within this diversified range while servicing over 21 countries and 25,000 clients.
The reason I’ve thrown in a technology company is their revenue isn’t derived from a tangible location. Similar to most tech companies, their revenue comes from their intangible software assets, which are what’s made these big tech companies defensive during the pandemic.
They’ve released their 2020 financial report and revenue is down 2.9%, which isn’t too bad. Though it’s not something, you want to see consistently. Their EPS have taken a hit and declined by 43%.. that one stings. A deeper dive would be needed to understand why net income was down so much. However, with just a surface-level analysis, I’m going to assume the worse is behind them as the world slowly gets back on its feet.
What makes this dividend payer attractive to me are the payout ratios for considering dividend safety. They’ve had an average EPS payout ratio since 2011 of 70% with no real, meaningful spikes since that period.
Their Free Cash Flow (FCF) payout ratio, which is much better for considering dividend safety is at 51%. FCF is more critical, because the dividend is paid from cash, and FCF is what’s leftover for us owners (shareholders) once all expenses are paid. Tech companies don’t have many capital expenditures so they can be cash producing machines. There could further declines in revenue and earnings, which eventually will mean Free cash Flow declines, but for now, they’re holding up. Which, in my opinion, makes the dividend safe.
April & October- Coca-Cola Amatil (CCL)
The other stock I’ve chosen is a consumer staple which bottles and distributes multiple brands of alcoholic and non-alcoholic beverage, of course, the most notable brand being Coca-Cola.
CCL is one of Asia-Pacific’s largest bottlers for alcoholic and non-alcoholic drinks, and one of the world’s largest bottlers for the Coca-Cola Company.
They have a long operating history with this business starting its roots in 1904 as British American Tobacco company. From that starting point, they slowly acquired bottling rights and distribution centres; eventually casting aside their interest in tobacco and focused solely on beverages and some snack foods.
With this exercise, we’re looking to get paid every month but also have some dividend stability. Coke lines our shelves and so do most of their other brands, such as Kirks and Monster Energy, as an example. Their profits and cash flow should be more shielded than other businesses during this recession.
Here is the link to a list of their drinks they bottle and supply, it’s an extensive list and some well-known brands on there. https://www.ccamatil.com/au/Our-beverages
Going to their payout ratios for 2019, they paid out 90% of earnings as a dividend and 82% of Free Cash Flow. These payout ratios are high; however, the 82% Free Cash Flow payout is entirely in line with the Australian payout averages. These payout ratios are a function of the businesses age; it’s a slow-growth company, not a high growth tech company where they need to plough their earnings back into the business for growth.
Most shareholders know this company can’t spend much money on growth, which leaves CCL with 2 options. Either retain earnings and build a cash buffer or return profits to shareholders via buybacks and dividends. Aussies love dividends, so they choose to pay most of their earnings out as a dividend.
Depending on their 2020 results, I’m currently a believer, that this business should keep paying their dividend through the tough times.
May & November- Rural Funds Group (RFF)
This one pays on the last day of the month, in April and October. It also pays 4 times a year, including January and July. But honestly, I liked it too much not to put it in as a May and November pay date. Close enough is good enough, right?
Rural Funds Group is another REIT. This REIT invests in agricultural assets, such as cattle farms, vineyards, cotton farms, almond farms and macadamia farms, just to name a few.
Their core investment strategy is to buy these assets then lease them out to experienced tenants, acting as the landlord rather than the operator of the assets. Their current average lease expiry is 11.5 years. The above image is RFF’s assets and who they’re leasing them to. You can see they don’t just lease out to mum and dad farmers; their leases are big corporations who are going to be more stable and consistent.
Going off their 2020 forecast, they’re predicting adjusted funds from operations (remember AFFO is the cash left over after all expenses are paid) of 13.5 cents and distribution of 10.85 cents. With these numbers, we can calculate a payout ratio of 80%. Although it seems high, this is a perfect number, considering REITs have to pay out 90% of earnings.
The way I consider this, is these farms will be worth more in 10 years from now. The other stocks and funds should see growth too, but thanks to the farming industry I can see this having more stable growth.
We have a growing global population, where more and more people will need food. Of course, just like anything, there will be bad times, but there’ll also be good times, and overall, I can see their assets being worth more in 10-years’ time.
June & December- Whitefield (WHF)
Next on the list, is the diversified LIC Whitefield.
Whitefield has a long operating history, as they were founded in 1923 (almost 100 years!). Their current investment objective is to produce higher returns than the ASX200 Industrials accumulation index over 5-year averages.
They follow the industrial index closely. The industrials index is similar to the ASX200, except it excludes any resource companies (such as mining, oil, etc). Here is a link if you would like to learn more about this index. https://www.spglobal.com/spdji/en/indices/equity/sp-asx-200-industrials/#overview
I say follow closely, because, they use some qualitative factors to determine how much stock they should buy, so they don’t just follow the index blindly. Here is the 5-second elevator pitch for WHF’s strategy. They use human behavioural biases to buy and sell more substantial blocks of stock. For example, if the market sells off a company, but WHF thinks the company still has good prospects, then they’ll buy up large portions of its shares. It’s a key reason how they achieve outperformance.
They’ve outperformed their benchmark over 1,3,5 and 20-year periods. Not only this, but they have either raised or maintained their dividend for 30 years. Considering this dividend history, they’ve tried to keep their tradition alive and raised their most recent dividend from 2019-2020 by 2.5%. It’s not much, but it’s something, now the next question is can they even afford this dividend.
From an earnings perspective, they cannot afford to keep paying this out. They paid out 0.2025 cents per share in 2020 and earned 0.1776 per share; this means they paid out 114% of earnings in 2020.
However, their prudent cash management has left them $81 Million in reserves, or 0.88 cents per share in reserves. We will never know how they’ll spend their reserves or cash; they could foresee a more significant economic downturn, and, to preserve capital, they might cut the dividend. In the meantime, if their earnings don’t take a gigantic hit, they could keep topping up the dividend with their reserves and maintain it at their current level.
I’m not as optimistic as some of the other businesses listed on this post. One of the LIC’s I own has substantial reserves, and they still cut their dividend in 2020. Not by much, but they still reduced it which I didn’t expect. Whitefield’s in a good position, but it’s not entirely safe from cutting their dividend in the next year or so.
The monthly paying portfolio conclusion
Here is the monthly paying portfolio, I’ve put all the stocks and funds into a table so you can see how it works each month (remember RFF pays the last day of April and October, but it was too good to pass up).
This was just a fun exercise to see what an all Aussie dividend-paying portfolio could look like. I tried to find stocks that I think wouldn’t cut their dividend (except for the ETF), it was a lot harder then I thought it would be as most companies have already cut or deferred their dividend.
I might be completely wrong in my analysis, and it’ll be interesting to come back in a years time and see how all these stocks held up.
What do you think, do you like this portfolio or does it seem too risky and some of these companies might just cut as well?
Let me know in the comments below!