Value and dividend shares have done nicely out of the market's rotation out of growth stocks this year.
Two experts had even predicted the S&P/ASX 200 Index (ASX: XJO) would deliver 4.5% to 4.8% gross yield this year.
This would be sweet relief for all those income investors that suffered in 2020.
"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," Plato Investment Management managing director Dr Don Hamson said last month.
"Thankfully, we've now seen a very swift recovery in dividends."
AMP Capital portfolio manager Dermot Ryan this week agreed, saying there was an almost market-wide "rejuvenated dividend outlook".
"The turnaround at this stage has been led by larger cap names, whereas smaller companies without the benefit of diversified cash flows have been somewhat later to benefit. That said, we should see strong growth across the board from this point on."
Don't just blindly pick dividend shares though
However, Ryan warned that ASX investors still need to be selective about which industries and companies to harvest dividends from.
Two sectors are even forecast to produce shrinking yields in the next couple of years.
"Dividends in almost every sector are forecast to grow strongly on a one- and two-year basis, with the exception of materials, which are coming off records driven by those soaring iron ore prices and volumes – and utilities, who are suffering from poor pricing, particularly in wholesale electricity."
He also red-flagged a couple of subsectors.
"Tourism and education are expected to also continue to languish, along with the insurance sector which now has widespread flooding to add to its list of woes at a time when low interest rates are strangling the carry on insurers' cash reserves."
The big risk to expected dividend growth
Ryan said that the coronavirus pandemic still remained the largest threat to expanding dividends.
"The main risk to this two-year dividend outlook is linked to vaccinations and the associated threat of lockdowns, which will remain high until a critical proportion of the population are inoculated."
A critical mass of the vaccinations will mean travel and tourism can be resurrected, and might even trigger an export boom.
"The world – and particularly Australia – appears overstimulated and we believe that when the world is vaccinated, inflation might follow," said Ryan.
"We have seen a little in the way of that kind of inflation recently in parts of the mining sector in Western Australia, a state that has been largely COVID-free since the first wave of the pandemic. But for now, we believe a little inflation is normal this early in the cycle, although a factor to keep an eye on in the event that asymmetrical inflation in sales or cost lines starts to cut into company profit margins."
But if the vaccine program could continue without disruptions, Ryan, like his AMP Ltd (ASX: AMP) colleague Shane Oliver, thinks the ASX will break its all-time record.
"We expect that the market will continue its strong push higher through the ASX's record high of 7,200, driven by the strong profit and dividend growth in local equity markets."
