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Upgrade season – Broker dividend plays for 2021


If you’re looking for some generous dividend-paying stocks before the end of the year, you’ll find that the usual suspects – the banks, Telstra, and the real estate investment trusts (REITs) – have fallen in share price due to COVID-19, but that their dividend yields have remained quite high (although the REITs don’t offer franking). It is useful to know that when a high-paying dividend stock takes quite a big hit to its share price, usually due to an unforeseen shock, the stock’s yield then rises (that is, assuming the company keeps paying a dividend). This is where the importance of research and analysis comes in. As COVID-19 has shown, not every business, even in the same sector, is created equal.

Three stocks that offer high dividend yields heading into the end of the financial year are: Fortescue Metals (FMG), National Australia Bank (NAB), and REIT, Vicinity Centres (VCX). In this article we look at broker responses on the above three stocks:

Fortescue Metals (FMG) – Ord Minnett has a ‘buy’ recommendation, with a target price of $20.00. The broker has released quite a positive report on the company, expecting another solid operational performance, after record iron ore shipments of 47.3 million tonnes in the June quarter and 178.2 million tonnes for FY20, exceeding the top end of guidance, and representing a rise of 6% on FY19. FMG’s stellar 2020 came on the back of buoyant Chinese demand and a strong run in the iron ore price (with Brazilian production still curtailed). The miner expects its gross yield of 14.9% (on a share price $16.86) to be paid next quarter.

  • NAB – UBS has a ‘buy’ recommendation with a target price of $20.50. The broker expects the 2H of FY20 to be materially weaker due to the impact of COVID-19 and realising “post-tax additional provisions of $266 million for wealth and banking remediation, $90 million after-tax going to payroll remediation and $94 million worth of post-tax property assets impairment, mainly due to the consolidation of Melbourne office space.” The broker says this will reduce NAB’s Common Equity Tier 1 ratio by 15 basis points. But this shouldn’t be an issue, as the bank has weathered storms like this before, has a strong balance sheet, and is well-equipped to handle any downturn. NAB was also one of the few banks both to raise capital and pay two (interim and final) dividends in 2020, albeit that its interim dividend was cut by about two-thirds.

    Vicinity Centres (VCX) – Credit Suisse has an ‘outperform’ recommendation on the half-owner of Chadstone, with a target price of $1.61. While the broker says the recent result was below expectations and no guidance was provided, it wasn’t a surprise. Most firms have not issued guidance, simply because of the COVID-19 related uncertainty, without a readily available vaccine. Most of it relates to the lockdown in Victoria where +50% of the portfolio is positioned. As a result, the broker has pulled its numbers down a fraction to reflect lower rents. FY21 and FY22 earnings forecasts were revised by -8.9% and -5.2% respectively. VCX is an interesting stock for those comfortable with higher risk and uncertainty – but remember, the yield is unfranked, whereas Fortescue and NAB retain full franking.

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