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Speaker 1: Welcome to the Fear and Greed summer series. I'm sure, Aylmer.

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Speaker 1: Dividends on the ASEX have always been highly sought after,

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Speaker 1: thanks largely to franking credits and how the ACO treats payouts.

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Speaker 1: So how do you pick a good dividend stock? Lachlan

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Speaker 1: Halloway is an equity market strategist at morning Star. Lachlan,

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Speaker 1: welcome back to Fear and Greed.

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Speaker 2: Thanks for having me again, Sean.

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Speaker 1: Morning Stars recently published a new report, Australian Dividend Outlook

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Speaker 1: and Top Picks. What's it say?

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Speaker 2: Well, I think a few things. For context, you know, dividends,

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Speaker 2: I mean they've always been, as you mentioned in the opening,

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Speaker 2: a favorite amongs Australian investors because of franking. I think

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Speaker 2: particular the moment with hybrids rolling off, there's forty odd

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Speaker 2: billion of capital that has to find a home somewhere.

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Speaker 2: Those were fully franked fixed income like instruments, and I

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Speaker 2: think investors are probably looking at work in the money

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Speaker 2: go now and inequities have some appeeling characteristics of course

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Speaker 2: as an alternative, but it's going They deal with the

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Speaker 2: franking in terms of where we are right now in

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Speaker 2: yields across the ASX, they are relatively low compared to

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Speaker 2: the last decade or so. I think the trailing yield

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Speaker 2: on two hundred is something like three percent. The sort

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Speaker 2: of average is closer to four percent. So if you're

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Speaker 2: investing just broad stroke in the index, it's harder now

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Speaker 2: than it has been historically. That said, we've just put

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Speaker 2: together this new product, our report and our pick list

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Speaker 2: where we see across twenty five stocks, we've picked out

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Speaker 2: an average li of about six percent, so much better

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Speaker 2: than market, which would suggest that there are still plenty

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Speaker 2: of opportunities out there for dividends seeking investors. You just

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Speaker 2: have to be a a little bit more judicious.

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Speaker 1: So when you're looking for a good dividend stock, and

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Speaker 1: I have tied this myself, it's actually not as easy

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Speaker 1: as it seems. I mean, in the old days, banks Telstra,

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Speaker 1: you know, they're pretty solid. The banks aren't say a

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Speaker 1: solid now, but some of the ones who are paying

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Speaker 1: the highest dividends from Memory and Locklin. I could be

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Speaker 1: one hundred percent wrong here, but like some of the

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Speaker 1: energy companies, some of the coal companies, those sorts of guys,

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Speaker 1: and so you have to think, think, well, I'm happy

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Speaker 1: to invest in could So there's a lot more to

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Speaker 1: it than just like looking at the dividend isn't there?

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Speaker 2: It absolutely is. I think looking at last year's yield

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Speaker 2: is not good enough if you want to builderstable, robust

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Speaker 2: dividend portfolio. The way we've done it for this pick

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Speaker 2: list is sort of a quantitative and a qualitative side.

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Speaker 2: The quantitative bit is we look at our analyst forecasts

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Speaker 2: of dividend yields, so not just what happened last year,

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Speaker 2: but what we expect for the next few years. We

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Speaker 2: look for things like motes, so you know, does a

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Speaker 2: business have the attributes that can support earnings growth and

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Speaker 2: must support dividends. We look for a healthy balance sheet.

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Speaker 2: Of course, you know it doesn't have the balance sheet

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Speaker 2: to protect its dividend and defend its dividends. There are

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Speaker 2: a few of the things. Low uncertainty businesses in general

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Speaker 2: are better candidates for us. We put on certain your

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Speaker 2: ratings on the business we cover. We like businesses where

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Speaker 2: we have reasonable visibility we think we do on the

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Speaker 2: earnings outlook, and that's a dividend outlook. That's another aspect

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Speaker 2: to it. So we kind of stitch all those things

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Speaker 2: together and we and we pull out the best of

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Speaker 2: the bunch. We try and get diversity across sectors too,

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Speaker 2: So I'm not just making some big bet on utility

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Speaker 2: is a real estate. We want diversity. I think that's

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Speaker 2: a generally good principle for income portfolios as well. And

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Speaker 2: that's the they were the underpinnings of our list.

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Speaker 1: Okay, so Lachlan and you've got to give us some

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Speaker 1: examples and a few of the most compelling dividend stocks

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Speaker 1: on your list.

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Speaker 2: Yeah, sure, so. Look, I think one we just added

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Speaker 2: was BHP. So it's look again in terms of some

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Speaker 2: of the qualities that you would want in a dividend stock,

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Speaker 2: very high quality, low cost assets both in iron ore

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Speaker 2: and copper, so it should make money through the cycle.

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Speaker 2: Near terminal prices that are one hundred dollars a ton

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Speaker 2: also also really help on valuation grounds. Looks reasonably priced.

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Speaker 2: It's not a not a screaming bargain, but we think

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Speaker 2: it looks reasonable. And I think that's you know, with

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Speaker 2: the dividend portfolio, I think there's probably some reason not

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Speaker 2: just to look purely at the bargain basement, you know,

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Speaker 2: potential value trap stocks, A reasonably stable dividend pay with

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Speaker 2: high quality assets is probably more where shuld be focusing.

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Speaker 2: So BHP is one we added at call out as

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Speaker 2: well AGL in the utility space more of a conventional

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Speaker 2: sort of dividend sector. That's you know, the stock's been

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Speaker 2: under pressure recently because I think the market is rightly

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Speaker 2: concerned about what's going to happen to ajail's earnings when

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Speaker 2: it's cheap fossil fuel linked energies apply contracts col and

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Speaker 2: gas start to roll off. That is definitely concerned it

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Speaker 2: is going to punch hohole earnings. But we think the

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Speaker 2: market is probably underappreciating the role that battery investment's going

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Speaker 2: to play in recharging those earnings, filling some of the

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Speaker 2: whole that's going to be left. They're getting great return

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Speaker 2: on investment on those batteries now well above their cost

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Speaker 2: of capital. It looks like there's a long pipeline and

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Speaker 2: batch development there, so we think that's going to help

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Speaker 2: off set the earnings hit from the coal fire generation

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Speaker 2: and support dividend outlook for AGL, another one of the

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Speaker 2: stocks we have on the list.

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Speaker 1: What's interesting when I asked you about the top dividend

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Speaker 1: stocks you talked about the outlooks for the companies, and

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Speaker 1: that's kind of what it is in it though. I mean,

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Speaker 1: it's all about being sustainably able to provide a dividend

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Speaker 1: and not lose capital.

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Speaker 2: I think that's exactly right. It's probably more if you

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Speaker 2: are an income folks investor says a general rule. It seems,

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Speaker 2: you know, the stability is more important maybe than the

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Speaker 2: real growth side of If I'm just investing for investing

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Speaker 2: growth or for capital returns. If my if my long

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Speaker 2: term investors in my stock falls twenty thirty percent in

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Speaker 2: the year, it doesn't really matter all that much. Might

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Speaker 2: be psychologically painful, it's not in the world. If I'm

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Speaker 2: relying on dividends as an income stream to support my

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Speaker 2: life style, twenty percent or thirty percent, cutting dividend is

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Speaker 2: a could be a much more serious problem. So the

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Speaker 2: outlook stock specific stuff, not big sector bets, is probably

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Speaker 2: a general principle that's worth worth considering.

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Speaker 1: Lachlan, thank you for talking to Fearing Greed summer series.

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Speaker 2: Thanks any Michel.

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Speaker 1: That was Lachlan Halloway, equity market strategist at morning Star

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Speaker 1: Fear and Greed. It's not a financial advice podcast, and

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Speaker 1: if you want to invest, we recommend you visit a

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Speaker 1: financial advisor who can tailor investments to your needs. Don't

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Speaker 1: forget to following the podcast your episodes every day during

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Speaker 1: our summer series Bigler shows up back from January twelve.

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Speaker 1: I'm sure I all matten, this is here and greet