Buy Hold Sell: 3 stocks with dividends on the rise (and 2 on the chopping block)

When it comes to income, you need a recipe for success. Sure, term deposits are cooking up around 5% yields right now, but for income-hungry investors, 5% may just not cut it.

That's where equity income comes in. The yield on the market itself has been around 4-5% over the last 20 years - and a diversified portfolio of stocks with rising and sustainable dividends and earnings growth can deliver far more income than that.

Then there are franking credits, which add a little extra flavour to investors' portfolios - and typically, an additional 2% in yield.

Source: IML/Morningstar

So, in this episode, we're serving up some of the market's dividend darlings and throwing the scraps (stocks with falling dividends) into the trash.

Livewire's Ally Selby was joined by IML's Michael O'Neill and Plato Investment Management's Dr Don Hamson for their analysis of three stocks with impressive 1-year forward yields.

Plus, they also name one stock they believe could see its dividends on the chopping block in 2024.

**Please note that this episode was filmed before the recent announcement regarding ANZ's takeover approval of SUN by the ACCC.

**Note: This episode was filmed on Wednesday, February 14, 2024. You can watch the video, listen to the podcast or read an edited transcript below.

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Edited Transcript

Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're going to be taking a look at three stocks that analysts believe are set to grow their dividends over the coming year. Plus, we'll also ask our guests to name one stock that could see its dividends on the chopping block.

To do that, we're joined by Dr Michael O'Neill from IML and Dr Don Hamson from Plato Investment Management, two dividend doctors with us today. Very exciting. Let's get straight into it.

First up, we have Amcor, which is expected to grow its dividends by 5.52% over the coming 12 months. Michael, I'm going to start with you. Is it a buy, hold, or sell?

Amcor (ASX: AMC)

Michael O'Neill (BUY): It's a buy. Amcor is a leader in packaging for quite defensive end markets. We have seen some softness in their volumes recently, but we track their customer pricing very closely. The need to push price and sacrifice volume has moderated. The markets look to be more favourable. As the volumes recover, we should say that driving operating leverage from Amcor improved its margins and grew its dividend.

Ally Selby: Okay, share prices sunk around 16% over the last 12 months. Don, over to you. Is it a buy, hold, or sell?

Don Hamson (SELL): It's a sell from us, Ally. We don't think it's growing fast enough and it's not cheap. A lot of the defensives aren't cheap, so we think we're weighing up how much it's going to grow versus the price you're paying. For us, it's a sell.

Suncorp Group (ASX: SUN)

Ally Selby: Okay, next up, we have Suncorp Group. Analysts expect its dividends are going to grow by 21.13% over the next 12 months. That's quite a lot. Don, over to you. Is it a buy, hold, or sell?

Don Hamson (BUY): It's a buy. We like the insurers, actually. You may not like it when you open up the letter with your new premium and it's up 20%, etc. But clearly, if you're a shareholder, that's actually very good. So, you've seen a lot of premium increases and interest rates over the last couple of years have obviously gone up. Maybe they're going to plateau where they are, but they're a lot higher than they have been in the last couple of years. So, they take your money and they invest it, and they make a bit more money on it. So, we like most of the insurers and definitely Suncorp, so buy.

Ally Selby: Investors in Suncorp have also made some money recently, with the share price up around 14% over the last 12 months. Over to you, Michael. Is it a buy, hold, or sell?

Michael O'Neill (BUY): It's a buy. I'm sure, like Don, we're eagerly awaiting the results of the verdict to the appeal of the ACCC's decision on the sale of the bank from Suncorp to ANZ. That could be a win for capital return to shareholders, but you don't need that to have a buy on the stock. Certainly, to Don's point, there are several things underpinning the growth in Suncorp's dividends over the next few years, [like] higher investment earnings. I think the yield on funds held to pay future claims has gone from 1.5% to 5%. And then again, pricing, motor, and home insurance stings as a consumer. But given the weather costs, the supply chain issues, and the reassurance costs, they will have predictable earnings growth for years to come.

Fortescue (ASX: FMG)

Ally Selby: Okay. Last up today we have Fortescue, which is a favourite among our readers. Analysts believe its dividends are going to grow by 26.33% over the coming 12 months. Michael, last one for you. Is it a buy, hold, or sell?

Michael O'Neill (SELL): That's a sell. So, we look at the iron ore market and the supply and demand imbalance and the prices that iron ore has hit recently, and we still think that prices in the order of $130 to $140 per tonne are not sustainable. Now, when you're investing in commodities, it's important to remember that ultimately commodity stocks follow commodity prices. It's dangerous to get into the trap of looking at them on price to earnings or dividend yields when the commodity price implied by the current share price is not sustainable. We see this stock has been exposed not only to potentially unsustainable dividends but also to the volatility of the capital that comes with that.

Ally Selby: Okay. Its share price has lifted around 23% over the last 12 months. Over to you, Don. Is it a buy, hold, or sell?

Don Hamson (BUY): It's a buy for us because iron ore prices have held up and are much higher than they were last year. It's going to be making better profits, and even their lower-quality iron ore has held up well. So, we think in the short term, it's going to have some good dividends, but I do agree with Michael. You are beholden to whatever the commodity prices are, so you've got to be very vigilant if you're an investor and cut your losses if commodity prices change very quickly.

Ally Selby: That just shows that two views make a market. Okay. I'm excited for this. We asked our guests to bring along a stock that is slashing its dividends in 2024. It's a little bit of drama. Don, what stock have you brought for us today?

South32 (ASX: S32)

Don Hamson (SELL): Well, in a previous episode, I talked about falling lithium and nickel prices, and you cannot defy those if you're a commodity producer. That's going to be the revenue driver. So, I could pick pretty much any of them, but stocks like South32 are likely to cut their dividends given that their underlying commodity mix has changed. And no matter how much you try to cut costs, you're not going to make up for those big falls.

Ally Selby: Okay, over to you Michael. What stock do you believe has its dividends on the chopping block?

Pilbara Minerals (ASX: PLS)

Michael O'Neill (SELL): For me, that would be Pilbara, and I completely agree with Don's focus on stocks that are most at risk. Lithium has had a 50% fall in prices in the last quarter. Pilbara has had a boon of cash flows in 2022, and 2023, but they've come to an abrupt halt, and the company's flagged that they won't be paying an interim dividend.

Ally Selby: Well, I hope you enjoyed that income special of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.