Much has been made of the dividend yields available from Australia's ASX-listed resources and energy stocks.
That has in part been driven by surging prices in the usual suspects, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) Westpac Banking Corp (ASX: WBC), Telstra Corporation Ltd (ASX: TLS) and a number of other blue chips.
With some big four bank yields dropping below the magical 5% mark, investors have clearly begun looking elsewhere for yield. And they have found it in a very unusual place.
Woodside Petroleum Limited (ASX: WPL) current sports a fully franked dividend yield of 6.5%, according to Commsec. Grossed up that's 9.3%, and therefore investors need little capital growth in the share price to match the long-run average annual return from the share market. BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are both paying out a yield of 4.8% fully franked.
Commonwealth Bank boasts a piddling 4.4% yield by comparison.
Source: Google Finance
But these resources and energy stocks are not well-known as dividend stocks for a very good reason. They are highly capital intensive – with most of the profits needing to be plowed back into the business to replace depleting resources, whether it be oil, iron ore, coal or gas. If they continued to pay out high dividends, that leaves these companies with little or no capital left over to invest.
That is shown in BHP's yield over the past decade – an average of 2.6%. Up to 2012, Woodside's average yield was 2.9% while Rio's average yield since 2005 has been 2.5%.
The other issues is that over the past five years, the trio's shares have all fallen by more than 20%, while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has gone in the opposite direction, up 23%. That has been driven by huge falls in commodity prices, particularly iron ore, coal, and oil.
Source: Google Finance
No 5% dividend yield can make up for that effort.
Sooner or later, these three companies are likely to be forced to cut their dividends and revert to their long-term average payouts. That will no doubt disappoint many investors, but they can no longer say they haven't been warned. And you don't have to totally rely on us either – broker Morgan Stanley has raised the very same issue around BHP today.
