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This top fund manager believes dividend yields are going to 0%. Where should you invest?

In a media release today, Allan Gray Chief Investment Officer, Simon Mawhinney made a prediction for ASX share dividend yields.

He said the yields for the majority of ASX listed companies could soon be zero or near zero. According to the release, “Allan Gray is progressing on the basis that dividend yields will be close to zero in the near future for the majority of ASX-listed companies.”

The fund manager also stated that APRA had written to banks and insurers in April requesting a reduction in dividends.

This has likely contributed to the dividend cuts from Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC)Australia and New Zealand Banking GrpLtd (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB). CommBank, Westpac and ANZ have suspended their dividends entirely while NAB has cut its dividend significantly.

The diamonds in the rough

However, not all news regarding ASX share prospects was negative in the release. The fund manager pointed out that some companies have benefitted from the wave of events brought on by the coronavirus and were in a position to lift their dividends. The examples provided included Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL). These staples have benefited from both panic buying and the coronavirus shutdowns. 

Additionally, the fund manager pointed out there is a significant gap between defensive shares cyclical shares. For instance, healthcare and utilities versus materials and banks. According to the release, the April market rally saw defensive companies that had performed well prior to COVID-19 favoured against cyclical companies. If the announcement is correct, this disparity will not continue.

Mr Mahwinney said:

This divergence can’t continue indefinitely and it is important not to forget what might already be priced into cyclical company share prices. Everything has a price and a momentum shift into cyclically-depressed shares seems well overdue.

An example of a defensive company fitting this description is Ansell Limited (ASX: ANN). Ansell rallied close to pre-coronavirus prices in April and has since reached new record highs. 

If the fund manager is correct, cyclical companies that may rally include BHP Group Ltd (ASX: BHP), Woodside Petroleum Limited (ASX: WPL) and Bank of Queensland Limited (ASX: BOQ). Each are now trading at significantly lower share prices than sold for prior to the coronavirus pandemic.  

The opportunities

The release also highlighted where the fund manager sees opportunities for ASX investors:

Despite earnings and dividend headwinds, we believe investors with a firm focus on the fundamentals and the long term will benefit from mispricing opportunities currently in the market.

These opportunities are in those companies that typically have strong balance sheets and excellent asset bases, but which can be bought at extremely depressed prices given earnings headwinds.

One example of a company that may meet Simon Mawhinney’s dividend opportunity suggestion is Treasury Wine Estates Ltd (ASX: TWE). Treasury Wine has a strong balance sheet and an excellent asset base of high-quality brands. Currently, the Treasury Wine share price is significantly depressed and it is down 44% from its 52-week high of $19.47. While Treasury earnings could face headwinds from the coronavirus, we can likely see its yield recover in the long term.

Where to invest $1,000 right now

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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool Australia has recommended Ansell Ltd. 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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