Macquarie’s Top 10 ASX dividend stocks: How does a 26% yield sound?

Australian investors have long had a love affair with dividends. Why not? Australian companies are among the highest dividend payers in the world.  

Consider the compound annual growth rate (CAGR) of the ASX All Ordinaries Index (All Ords) over the last 20 years is 5.16% p.a. In comparison, the CAGR of the ASX All Ordinaries Index Total Return Index (All Ords TR) which adds back dividends, is 9.82% p.a.

Australian Shares With and Without Dividends 20 Years (All Ords TR vs All Ords)

This implies that the ASX’s dividend yield over the last 20 years is 4.66% p.a. According to financial and economic data provider Multipl, the average dividend yield for the S&P 500 in the USA was just 1.91%.

The massive difference between the two markets is most likely explained by the difference in taxation of dividends across countries. In the USA, dividends are paid by companies from after tax earnings, and are then taxed a second time in the hands of shareholders when they pay their income taxes.

In Australia, a system of “franking” or “dividend imputation” credits results in most shareholders getting a credit for the tax a company has already paid on the profits that are the source of a dividend. In this way, dividends paid by Australian companies are only taxed once.

The upshot is US investors tend to have a greater preference for capital gains over dividends. When a company pays a dividend, its share price typically falls by the amount of the dividend because new shareholders miss out on the benefit of the cash the company no longer has.

By not paying a dividend, or by paying a smaller dividend, the share prices of US companies tend to appreciate at a greater rate than otherwise. In summary, US companies tend to return a similar amount over the long run as Australian companies (a CAGR of 11.34% p.a. on a total return basis), but the mix is skewed more to share price appreciation.

Australian Shares vs US Shares Total Return 20 Years (All Ords TR vs S&P 500 TR)

Big Mac’s Big 10 Dividend Stocks

This brings us to Macquarie’s Top 10 ASX grossed up dividend paying companies.

“Grossed-up” means adding back the benefit of franking credits. Basically, we’re looking at pre-tax yields. If you don’t pay tax, for example, as is the case for some qualifying retirement income streams*, the grossed-up yield is effectively what you’ll be earning on a fully franked dividend.

(*As always, the best person to ask about this stuff is your financial advisor – so ask them – not us!).

If this is you, then iron ore miner Mount Gibson Iron (ASX: MGX) takes out top spot for the highest fully franked dividend yield of a massive 26.3%. Salary packaging, leasing and fleet and asset management company McMillan Shakespeare (ASX: MMS) takes silver with a 12.7% grossed up yield, and automotive sales, service and parts company Autosports Group (ASX: ASG) takes bronze with a 12.2% grossed up yield.

Hey, even if you’re like me, and bleh…you have to pay tax, the non-grossed-up dividends of the stocks in the table below are still pretty impressive.

Top 10 FY1 Grossed Up Dividend Yield. Source: Macquarie Research

But there might be a catch!

No doubt, these are the highest grossed up dividend payers on the ASX, but no doubt also, nobody (not even Macquarie) knows where the share prices of these companies are going to be in the future.

It’s important to remember that the return you receive as a shareholder is made up of both capital gains and dividends. There’s little point selecting a stock on the basis of a great dividend yield if it proceeds to fall more than that in share price.

Often companies pay out high proportions of their profits as dividends because they have few options to grow their earnings. Companies with lower earnings growth typically enjoy smaller rates of share price appreciation compared to those with higher earnings growth rates.

Finally, consider the table above is based on Macquarie’s forecasts for the dividends these companies are going to pay in the current financial year. It is possible that they expect a particular company to pay a much smaller dividend next financial year, and therefore what may appear to be a fantastic yield now, may not be sustainable.

It might be helpful therefore to also consider Macquarie’s rating and 12-month price targets for the stocks in the table. Here’s the details for the Macquarie research reports I had on file:

Macquarie ratings and price targets for the Top 10 FY1 Grossed Up Dividend Yield. Source: Macquarie Research

On the face of it, with the exception of New Hope Corporation (ASX: NHC), it doesn’t appear that Macquarie thinks these stocks are about to drop off a cliff in terms of share price. If anything, in most cases, they’re forecasting decent gains on top of the company's bumper dividend. 

Again, we’re looking at a snapshot of Macquarie’s views here, and like any major broker, they regularly update their ratings and price targets. But, all of the warnings aside, I trust the Top 10 Grossed Up Dividend Yield list will be a useful resource for investors who love big, juicy fully franked dividends!