Australia's burgeoning trade surplus is highlighting where ASX investors might find the pot of dividend gold at the next reporting season.
Our country recorded its biggest trade surplus on record in May of $5.75 billion, which was ahead of economists' expectations, and that's largely thanks to iron ore exports with both volume and prices increasing over the previous period.
By extension, this means our S&P/ASX 200 (Index:^AXJO) (ASX:XJO) iron ore producers are raking in the cash – and a good chunk of it will find its way back into shareholders' pockets when these miners turn in their full year results next month.
Miners make better income stocks
It shouldn't be lost on income seeking investors that big miners are arguably the best-placed high-yielders to increase their dividend payments.
In contrast, classic income stocks like Telstra Corporation Ltd (ASX: TLS) and the big banks such as National Australia Bank Ltd. (ASX: NAB) are lucky if they don't need to cut their dividends.
The positive dividend outlook for the iron ore miners is shared by Deutsche Bank, which said that this reporting season's dividends is something to hang on for.
"We are forecasting a dividend bonanza from the iron ore names this reporting season not only because of high prices but also we see the use of buybacks now restricted," said the broker.
"So, on top of ordinary payouts, special dividends are also likely to feature heavily."
Dividends vs. buybacks
Off-market share buybacks won't be the capital return method of choice this round unlike the past year when company boards rushed to return as much franking credits as possible ahead of the federal election.
This was because federal Labor was threatening to end cash refunds on excess franking credits that were above an investor's tax obligation. We know how the election went for Labor so the urgency to release franking credits through off-market share buybacks has waned.
ASX-listed companies are more likely to favour dividends and Deutsche is picking Fortescue Metals Group Limited (ASX: FMG) as the miner that's likely to unveil the most significant dividend surprise even though it gave an unexpected dividend gift to shareholders in May.
The bigger iron ore producers BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are also expected to pay a good fully-franked dividend as well although I think other miners like South32 Ltd (ASX: S32) should be well placed to distribute a generous payout as well given its strong free cash flow.
According to estimates from UBS, the forecast FY19 yield for Fortescue is around 12%, while BHP and Rio Tinto stand at around 8% each and South32 is close to 5%. The estimates do not include franking.
