From time to time I take a look through the rates offered for term deposits by the various banks. It never ceases to amaze me how low they are!
For retirees relying on term deposits to fund their retirement, this could pose a real challenge.
Furthermore, with typical blue chip shares like the big four banks deferring or cutting their dividends, it’s a passive income earner’s nightmare. It’s possible we’ll return to ‘normality’ soon and the big banks will be paying their juicy dividends once more. But in the meantime, many investors are being forced to look elsewhere for reliable dividend income. With that in mind, here are my thoughts on five dividend shares capable of putting term deposit rates (and potentially dividends) offered by the banks to shame!
Wesfarmers Ltd (ASX: WES)
Wesfarmers provided a retail trading update to the market on 9 June 2020. The update reported positive sales results across the Bunnings, Catch and Officeworks businesses. The three retailers delivered 2H20 to date sales growth of 19.2%, 68.7% and 27.8% respectively. COVID-19 restrictions have benefitted these businesses with more customers working, studying and undertaking DIY projects at home.
Kmart and Target delivered 2H20 to date sales growth of 4.1% and -1.8% respectively. Unsurprisingly, these results were largely caused by a reduction in foot traffic across shopping centres due to restrictions. Having said that, the Target business had already been underperforming for some time. As lockdown restrictions continue to ease though, both foot traffic and sales momentum for Kmart and Target has improved. Furthermore, Wesfarmers announced in May its plans to overhaul the Kmart group by closing some poorly performing Target stores and replacing some others with Kmart.
Wesfarmers currently has a trailing dividend yield of 3.6% on its current share price of $42.55. This far exceeds the interest rates provided by banks on savings accounts and term deposits.
I believe Wesfarmers’ diversity provides it with strength and, in my view, income investors would do well by holding the conglomerate in their portfolios.
AGL Energy Limited (ASX: AGL)
In its presentation to the Macquarie Australia Conference on 5 May 2020, AGL advised it had approximately $1 billion in cash and undrawn facilities, putting it in a strong and flexible financial position. Pleasingly, the company also has no bond debt refinancing until FY22.
In addition, customer account numbers are growing and the churn rate is on the decline.
AGL provided guidance for FY20 with underlying profit after tax of $780 million to $860 million. This is despite the increase in customer debts and unanticipated operating costs from the lockdown.
Electricity and gas are essential services. For this reason, despite its recent share price performance, I believe AGL will be able to continue paying dividends to its shareholders.
A trailing dividend yield of 6.32% makes it especially attractive for income but also long-term investors as energy markets recover post-pandemic.
Aurizon Holdings Ltd (ASX: AZJ)
Aurizon is Australia’s largest rail freight operator. Having successfully executed a $1.3 billion debt refinancing and reconfirmed its FY2020 earnings guidance on 3 June 2020, Aurizon has no further financing requirements until 2023. This could make the group a real gem in an income investor’s portfolio.
Furthermore, Aurizon’s operations have continued across its three businesses (bulk, coal and network) with minimal interruption during the pandemic.
Managing director and CEO Andrew Harding said:
”While the COVID-19 pandemic has had some impact to coal demand in Asia and on the Indian sub-continent, it has not been material to date to volumes and the Company’s earnings. Accordingly, we reiterate our underlying EBIT guidance of $880 to $930 million for FY2020.”
A trailing dividend yield of 5.46% without a material impact on earnings due to the virus could potentially provide a reliable income stream to investors.
Spark Infrastructure Group (ASX: SKI)
Spark Infrastructure owns and manages a portfolio of electricity infrastructure assets.
On 7 May 2020 at the Macquarie Investor Conference, Spark reconfirmed its FY20 distribution guidance of 13.5 cents per share. At the current share price of $2.13 this provides a dividend yield of 6.34%. This is on the back of strong cash flow from the company’s network businesses. As a result, the group could be well placed to continue distributing profits to its investors moving forward.
Spark Infrastructure is also shifting its focus to renewable energy to replace ageing coal power stations and help future proof the business.
Transurban Group (ASX: TCL)
Transurban is the owner and operator of toll roads across Australia and North America.
According to its 4 May 2020 Investor briefing, whilst Transurban saw noticeable declines in traffic numbers due to COVID-19 lockdowns, the group has seen improving traffic since the second half of April. The company did advise, however, that traffic levels remain sensitive to government announcements.
Pleasingly, Transurban has sufficient liquidity to meet capital requirements and debt refinancing obligations to the end of FY21. In addition, it raised $3.7 billion in debt to help strengthen its balance sheet. Furthermore, as lockdown restrictions continue to ease but the fear surrounding coronavirus remains, Transurban may benefit from increased traffic due to people avoiding public transport.
For income investors, the group expects the 2H20 distribution will be declared in late June and paid in August 2020. The group has a trailing dividend yield of 4.15% for FY20 on current share price levels.
While term deposits are considered to be safer investments than investing in securities, the interest rates currently offered by banks in real terms is approximately zero.
For this reason, investors could consider the ASX shares above to potentially provide an income stream in these uncertain times.
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Returns As of 6th October 2020
Motley Fool contributor Matthew Donald owns shares of Wesfarmers Limited. The Motley Fool Australia owns shares of Transurban Group and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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