ASX dividends: Are miners the new bank shares?

With ASX banking dividends drying up in 2020, is the answer for income investors ASX miners like BHP Group Ltd (ASX: BHP)?

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The ASX and the S&P/ASX 200 Index (ASX: XJO) have long held a reputation as very income friendly for investors. Whether it's our unique system of franking, or just a healthy love of a good dividend paycheque, the ASX is well-known for prioritising income over growth.

As an example, an ASX-based index exchange-traded fund (ETF) like the Vanguard Australian Shares Index ETF (ASX: VAS) currently has a trailing dividend yield of 2.75% (plus franking). Compare that to an American-focused ETF like the iShares S&P 500 ETF (ASX: IVV). That only offers a trailing yield of 1.52% on current pricing.

Historically, the largest drivers of the ASX 200's income prowess have been the ASX banks. Namely the big four in Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB). In years gone by, it was not uncommon for those banking shares to consistently offer fully franked dividend yields ranging from 5% to 7%.

A banking dividend drought

But 2020 flipped that paradigm on its head. ASX banks were amongst the hardest hit shares last year, and a large part of that sell-off was likely driven by a sudden and severe drought of banking income. For the first time in decades, Westpac didn't even pay an interim dividend. ANZ managed to, but it was delayed by several months. The dividends that the banks did manage to pay looked nothing like what investors were used to. Take NAB. In 2018, NAB paid out $1.98 in dividends per share. In 2019, that was down to $1.66. But in 2020, it was a miserly 60 cents per share all up.

On current prices, CBA is offering a trailing yield of just 3.52%, NAB at 2.53%, ANZ 2.47% and Westpac a depressing 1.46%.

Digging for dividends

But while the banks' star has fallen somewhat, another has been rising over the past year or so. ASX resources shares have emerged as the new divas of the ASX dividend party.

Take BHP Group Ltd (ASX: BHP). The 'Big Australian' is up close to 34% since the start of November last year, yet still offers a trailing and fully franked dividend yield of 3.86% today. Rio Tinto Limited (ASX: RIO) is doing one better, offering a fully franked trailing yield of 4.82%. And Fortescue Metals Group Limited (ASX: FMG) is putting up a whopping fully franked 7.06% at the time of writing, despite rising almost 45% since the start of November as well.

So are miners the new banks?

Well, they certainly are right now, if the raw numbers are anything to go by. But the big question about what the future holds remains.

It's worth noting that things are looking up for the banks as we start 2021. The Australian Prudential Regulation Authority has already removed the shackles on banking sector dividends that it imposed last year. If credit growth resumes in 2021 and beyond, the banks might well get back to paying the dividends of the past before too long. But keep in mind that near-zero interest rates aren't exactly a turbocharger for banking growth. Only time will tell whether they can pull off a complete redemption.

Turning to resources shares once more, it's also worth noting that these companies can only fund hefty dividends as long as commodity prices (namely iron ore) stay at the elevated levels we have seen in recent months.

Commodities, especially iron ore, are notoriously cyclical and volatile. And they can drop as fast as they can climb. Yes, iron ore is today fetching a healthy US$170 a tonne (roughly a 9-year high), rising from around US$150 just before Christmas. But it was only back in 2018 that we were seeing prices of just US$62 a tonne.

If we were to see that level again, you can bet that mining dividends would be far lower than what we see today.

Foolish takeaway

Every industry has its time in the sun, and banking and mining are no different. For the dividend investor weighing up banking and mining shares today, perhaps the only right answer is good old diversification.

Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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