Dividend shares were out of favour last year as the COVID-19 pandemic hit. Businesses roundly cut yields to preserve capital for tough times.
That made life difficult for older investors, who rely on yield for their day-to-day income.
"It's been near impossible for retirees to generate any sort of meaningful income from cash in the bank or bonds for a number of years now and when dividends were slashed throughout 2020, I think many would have been facing the prospect of drawing down capital to keep the lights on," said Plato Investment Management managing director Dr Don Hamson.
But as this year began, experts predicted dividend stocks would make a roaring comeback in 2021.
"In 2021, we're expecting a dividend increase of 30% in Australia in aggregate," Tribeca Investment Partners portfolio manager Jun Bei Liu said in January.
"In the low bond yield and low interest rate environment, it looks incredibly attractive."
And one ASX shares fund has now put its money where its mouth is.
Plato Investment Management announced Monday that its Australian Shares Income Fund has set a goal to rake in a whopping 7.8% gross yield this year.
The company forecasts the S&P/ASX 200 Index (ASX: XJO) would produce a 4.8% gross yield in 2021. Plato is betting that its active funds management will add another 3% on top of that.
Hamson attributed his team's confidence to a bumper mid-year reporting season last month.
"The February reporting season saw a number of companies declaring record dividends and what's most encouraging is that many of those businesses that have handsomely rewarded investors, look to have strong tailwinds in the foreseeable future," he said.
"Thankfully, we've now seen a very swift recovery in dividends."
The sectors to supersize ASX dividends in 2021
He picked out the banks as major contributors to income investing this year. Commonwealth Bank of Australia (ASX: CBA) was Hamson's pick out of the big four institutions.
"Its $1.50 dividend equates to only 67% of earnings and the bank has said its pay-out ratio is likely to be 70 to 80% this year, so a stronger second-half dividend is expected," he said.
"There's also the possibility management will use excess franking credits to undertake an off-market buyback in the coming year, which will be a lucrative opportunity for retirees in particular."
Hamson also named miners, and especially iron ore extractors, as a boon to income investors in 2021.
"We think this is a space income investors can't afford to ignore right now. Of the top 6 dividend payers in Australia, 3 are now mining stocks," he said.
"Are the payouts sustainable? Well, we think the supply and demand fundamentals for iron ore prices remain solid and if prices come off $100 per tonne from the highs, these companies still have good profit margins. Management at the big miners also seem to be learning from mistakes about over-investing in new mines which have impacted dividends in the past."
Outside of those industries, the consumer discretionary sector would also chip in with some dividend gems, according to Hamson.
"The likes of JB Hi-Fi Limited (ASX: JBH) and Super Retail Group Ltd (ASX: SUL) have delivered in spades for investors — and strong sales momentum in the first quarter of this year indicates the retail boom we saw stemming from the pandemic still has some way to go."
Hamson warned investors to avoid dividend traps with careful selection of quality companies.
"We believe diversity, active stock picking which focuses on avoiding dividend traps and tax effective portfolio management will be the keys to getting even more from dividends in the coming 12 months."
Plato's Australian Shares Income Fund is open to both wholesale and retail investors. But there is a sister product, Plato Income Maximiser Ltd (ASX: PL8), which simulates the experience as a listed investment company.
