It may have been high growth tech stocks that have dominated in 2020, but the latest ASX “buy” idea from a leading broker may be what’s needed for 2021.
The fact is, the price-earnings (P/E) expansion trade may have largely run its course and yield could be the soup du jour for the new year.
New ASX winners for 2021?
It was the collapsing interest rates and liquidity pump from global central banks that fuelled the P/E expansion trade.
But rates are approaching the lows in the cycle. And while we could still see more stimulus injected into the global economy, I suspect high yield stocks won’t be playing second fiddle for much longer.
Deterra share price is the latest buy idea from Macquarie
The broker initiated coverage on the Deterra Royalties Ltd (ASX: DRR) share price with an “outperform” recommendation today.
“The stock offers the unique combination of lower sensitivity to iron ore price movements than its peers and a strong production growth outlook, with volumes expected to increase 2.5-fold over the next three years,” said Macquarie.
“Our positive view on DRR is underpinned by the company’s firm dividend policy of 100% earnings payout, with dividends expected to be fully franked.”
Rivers of gold in iron ore
Deterra is paid royalties from BHP Group Ltd’s (ASX: BHP) South Flank project. While Deterra is only expected to pay a modest dividend this calendar year, this is expected to ramp up over the next few years as South Flank reaches full production.
Macquarie is forecasting dividends to total 13 cents a share in FY21, 22 cents in FY22 and 26 cents the year after.
This means the DRR share price could be yielding 6.5% in FY23, or around 9.3% if franking is included.
Why Deterra could be a 10% yield stock
But Macquarie’s estimates may prove to be too conservative if the iron ore price holds around current levels for the next few years.
“Buoyant iron-ore prices underpin strong earnings upgrade momentum for DRR,” explained the broker.
“At spot prices DRR’s dividend yield rises to 4% for CY21, 8% in CY22 and ~9-10% for CY23 and beyond.”
High-yield in a low rate environment
These estimates do not include franking, so investors who qualify for the tax refund will be laughing to the bank.
While the growth rate in fiscal and monetary stimulus may have peaked, ultra-low interest rates are likely to stay for a few years, at least.
I think high-yield stocks will experience strong demand for the foreseeable period.