Since 1 January 1900, dividends have made up 45% of the total return of the Australian share market. For those who are looking to recoup their money in the shortest time frame, retirees and others looking for income, dividends matter. With that in mind let's have a look at two of the biggest dividend-returning stocks in the ASX 100 to see if they are good candidates for your portfolio.
Metcash Limited (ASX: MTS) is the distribution and marketing company behind such brands as IGA, Mitre 10, Autobarn and Cellarbrations. Metcash is currently trading at $1.38 with a trailing dividend ratio of 11.23%. When we gross up for franking credits, it becomes a massive 16.04%.
The first thing we need to ask ourselves about Metcash is whether the dividend has further to fall. In 2012 Metcash paid out 28 cents per share, in 2013 it paid out a reduced 26 cents and in 2014 it only paid out 15.5 cents per share. I believe on reduced earnings and dividend ratio that the dividend does have further to fall, perhaps to 14.5 cents this year.
The second question we need to ask is whether Metcash has managed to turn around its business and offers us good long-term growth prospects from here. Metcash is at the beginning of a five-year restructuring phase to allow it to compete with the likes of Coles, owned by Wesfarmers Limited (ASX: WES), and Woolworths Limited (ASX: WOW). The major problem Metcash faces is that it is number three in all its markets and with the likes of Aldi and Costco nipping at its heels it is going to need to pull something pretty special out of the bag.
Metcash shares have fallen 50% in the last 12 months and are facing significant headwinds with both profitability and its dividend payout under pressure for the foreseeable future. Personally I am going to wait to see how successful Metcash's turnaround is.
Woodside Petroleum Limited (ASX: WPL) is an oil and gas company involved in the exploration, development and production of hydrocarbons around the world. Woodside is currently trading at $36.42 with a trailing dividend ratio of 8.32%. When grossed up for franking credits, it grows to a huge 11.89%
Again we need to look at the sustainability of this dividend yield. Woodside has increased its dividend every year for the last five years, but in 2013, it paid out 116% of the earnings per share (EPS), and in 2014 it paid out 87% of EPS. Woodside has a strong balance sheet but at some stage will need to start investing heavily in new production. Also, being a commodity producer means it has no ability to set its own prices, so the dividend will be impacted by what the market is willing to pay for oil and gas.
Woodside shares have fallen 14.2% in the last 12 months due to oil and gas price falls but I believe this weakness is a buying opportunity. Over the mid-term I expect Woodside to grow both its EPS and dividend payouts on the back of increased production. Whether or not it can maintain such a big dividend ratio remains to be seen.
