Investors have long relied upon ASX 200 bank shares for reliable chunky dividends each year.
But can we continue to do so?
Investment firm, Market Partners, explains why it prefers another type of ASX financial share over banks for dividends these days.
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Expert recommends better stocks for dividends
Instead of ASX 200 bank shares, Market Partners analysts James Gerrish and Shawn Hickman prefer insurance stocks.
The main case against the banks is not their relatively high share prices.
It's that investment loans have been powering their growth, and "that is likely to be pulled in" following the Federal Budget.
The Federal Government proposed major changes to capital gains tax (CGT) in the budget last month.
Under the changes, the 50% CGT discount for assets held longer than 12 months will be replaced by a cost base inflation indexation method from 1 July next year, and a minimum 30% CGT rate will apply.
In a webinar, Hickman, who is head of research at Market Partners' digital advice platform, Market Matters, said:
It's hard to imagine people are going to go out there aggressively in the near future and get fresh investment loans.
This may impact the earnings of the ASX 200 bank shares, which would threaten future dividends.
They're very secure businesses, but the growth factor for them to push a lot higher from here is very hard to imagine.
And that's why Market Matters is underweight.
We still own ANZ Group Holdings Ltd (ASX: ANZ). We still own Westpac Banking Corp (ASX: WBC). They're strong. They're going to make money. They're going to pay good dividends, but we don't see any reason to be overweight the banks.
While Gerrish emphasises that they are "certainly not negative on the banks" at today's share prices, investing is still "a relative game".
Gerrish explained:
… insurers benefit from higher interest rates. So they earn a higher income from their invested funds.
You pay your premiums, they invest the premiums, they earn a return on the premiums, then they pay out claims when they come up.
He points out that the insurance sector has experienced volatility for the past three or four years, but things have changed.
… now the tailwinds on the insurance side are improving, we think, and you think about insurers yielding circa 5%, banks mid-4%s.
Insurers have less economic sensitivity, banks have a greater degree of economic sensitivity relative to the insurers.
I think there's a case to be made that there's more upside in the insurers than banks.
That doesn't mean the banks don't go up from here, but there's probably more upside in terms of the insurance stocks relative to the banks.
Preferred ASX insurance share for dividends
Gerrish said Suncorp Group Ltd (ASX: SUN) is Market Matters' preferred ASX insurance share for dividends moving into FY27.
Since selling its banking division to ANZ, Gerrish reckons Suncorp has become a "simpler and safer institution".
He says a significant new reinsurance program, that takes about 2% off Suncorp's earnings, will protect future dividends for investors.
In this sort environment, where yield is really, really important, I think Suncorp stacks up here.
It trades about two P/E points cheaper than Insurance Australia Group Ltd (ASX: IAG).
I think it probably should trade more aligned with IAG.
Reinsurance protects Suncorp's earnings by transferring part of the financial risk of high payouts after major events.
Gerrish noted that climate change has raised risks and encouraged insurers to invest in reinsurance.
The experts point out that higher inflation can allow insurers to raise premiums, however it also makes repairs more expensive.
Gerrish added:
Insurance is a good business when they get their pricing discipline right and claims are benign.
That's the sort of environment that they're in now.
So insurance companies can now print a lot more money.
And the other thing around higher rates… is their investment portfolio has a long duration.
So, as they roll over fixed income — the majority is in fixed income — then they're getting higher rates of return on the investment portfolio as well.
Top ASX insurance share pick for growth
The experts said their top pick among ASX insurance shares for growth into FY27 is QBE Insurance Group Ltd (ASX: QBE).
Gerrish said:
They've been working hard over the last five, 10 years around simplification of their business.
So they went out there, they made a huge number of acquisitions… and it's starting to pay benefits.
The experts said QBE was an emerging turnaround story, with the share price trading close to 15-year highs.
Gerrish added:
Turnarounds can take a lot longer than anyone envisages.
But once a turnaround is starting to gain traction like it is in QBE, then the stock can run a lot further and a lot longer than anyone thinks.
So, on 12x [P/E], growing earnings at high single digits, yielding 4.7% part-franked [dividends] with earnings tailwinds, we think QBE stacks up.
ASX 200 bank share dividends
The trailing dividend yields of the ASX 200 bank shares are as follows:
- Commonwealth Bank of Australia (ASX: CBA) shares have a trailing dividend yield of 3% plus 100% franking
- National Australia Bank Ltd (ASX: NAB) shares have a trailing dividend yield of 4.5% plus 100% franking
- ANZ shares have a trailing dividend yield of 4.8% plus 70% to 75% franking
- Westpac shares have a trailing dividend yield of 4.3% plus 100% franking
