Top 10 ASX dividend stocks to watch in 2021

As markets remain volatile, we examine the ‘Top 10’ dividend stocks that investors can take advantage of on the ASX right now.

What is a dividend?

When buying and selling stocks there are typically two types of investors: those seeking to benefit from the positive price movements of an asset (capital gains) or those seeking to generate passive income from their investment (dividends).

In the most basic terms, a dividend is simply cash (or stock) distributed to shareholders from a company’s earnings.

In line with this, investors seeking to derive passive income from their shareholding often view a stock’s dividend yield as the most important metric. This metric, represented as a percentage, shows how much a company will pay an investor in dividends on an annual basis.

How to calculate a dividend yield

To calculate the dividend yield of a stock, an investor simply needs to divide the company’s annual dividend by the current share price.

For example, as part of Fortescue Metal Group’s full-year results released in August 2020, the mining giant announced that their full-year (annual) dividend came in at AUD$1.76 per share.

To calculate FMG’s current dividend yield then, you simply divide the company’s annual dividend by the current share price. In this case we see that FMG has one of the highest dividend yields on the ASX, currently standing at an enviable 7.00%, at the time of writing and according to the ASX.

Top 10 dividend stocks to have on your radar in 2021

Now that you know the basics of what a dividend is and how to calculate a stock’s all-important Dividend Yield, we take a look at the ‘Top 10’ dividend stocks that investors should watch in 2021.

  1. Fortescue Metals Group
  2. AGL Energy
  3. Stockland
  4. Aurizon Holdings Ltd
  5. Telstra Corp Ltd
  6. Dexus
  7. Woodside Petroleum Ltd
  8. Origin Energy Ltd
  9. Rio Tinto Ltd
  10. APA Group

Company

Ticker

Share price*

Dividend Yield*

Fortescue

FMG

$25.170

7.00%

AGL

AGL

$12.070

8.20%

Stockland

SGP

$4.170

5.31%

Aurizon

AZJ

$3.800

7.19%

Telstra

TLS

$3.090

5.31%

Dexus

DXS

$8.890

5.82%

Woodside

WPL

$26.680

4.71%

Origin

ORG

$5.160

4.99%

Rio Tinto

RIO

$120.740

4.66%

APA

APA

$9.600

5.17%

*Share price and Dividend Yield data all sourced from ASX.com or individual company websites where appropriate.

Fortescue Metals Group

Buoyed by strong iron ore prices, FMG saw its share price and operational performance improve dramatically in 2020 – with its stock more than doubling in value in that period.

In 2020, FMG paid out dividends totalling AUD$1.76 per share.

As iron ore prices remain elevated, FMG, at its most recent Annual General Meeting, said it remains commitment to maintaining a payout ratio of 50-80% of its full-year profits (NPAT).

AGL Energy

2020 proved to be a challenging year for AGL shareholders, with the stock falling over 30% since January as sharp declines in wholesale electricity prices ate into the energy provider’s earnings.

Despite that, AGL paid a final dividend of 51 cents per share in September 2020, taking the company’s full-year dividends to 98 cents per share. By comparison, in 2019 AGL paid out total dividends of 119 cents per share.

In late December the company provided the market with updated earnings guidance, saying that it now expected FY21 earnings (NPAT) to come in at between $500-580 million, down from the previous guidance range of between $560-660 million. This downgrade, noted the company, was triggered by a significant 'transformer incident/ outage', as well as 'increased earnings pressure arising from recent trading performance and a continued deterioration in market and operating conditions in Wholesale Electricity.'

Stockland

Despite the disruptions of the coronavirus pandemic, like AGL, in 2020 Stockland paid only a modestly lower dividend (distribution) than it did the year prior.

In December, Stockland announced that it expected to make a distribution of 11.3 cents per share, covering the first half of FY21. Despite providing an estimate for the upcoming H1 distribution, the company’s management said that guidance for the full-year distribution would not be provided at this time, 'due to ongoing uncertainty around the current and future impacts of COVID-19 on the economy, the broader community and business performance.'

For reference, in 2020 Stockland's full-year 2020 distribution came out to 24.1 cents per unit.

Aurizon Holdings

Aurizon did something that likely surprised the market in 2020: Its earnings (EBIT) increased 10% on a year-over-year basis while many companies faced earnings pressure as a result of COVID-19. As a result of that, an off the back of a 'commitment to return surplus capital to shareholders' – the company issued a final dividend of 13.7 cents per share – taking the full-year dividend to 27.4 cents per share.

By comparison, in FY19, Aurizon paid total dividends of 23.8 cents per share.

Beyond dividends, the company has also continued to buy back its stock at a rapid click, with management greenlighting as much as $300 million worth of stock buy-backs in FY21.

Telstra Corp

in 2020 Telstra paid 16 cent per share in total dividends, made up of special and ordinary dividends, leaving the blue-chip telco with a solid 5.28% payout ratio.

Will Telstra be able to maintain this dividend?

Most recently, the company said that to maintain a dividend in the 16 cent level, the company would 'need to achieve Underlying EBITDA in the range of $7.5 to $8.5 billion by FY23.'

For FY21 Telstra has guided for EBITDA of between $6.5 to $7.0 billion.

Dexus

Like Stockland, in a December market announcement real estate group Dexus said it expected to make a distribution of 28.8 cents per share, covering the first half of FY21.

Unlike Stockland however, at the time Dexus provided the market with more colour around its full-year distribution expectations, saying:

'Subject to there being no reinstatement of any major lockdowns or unforeseen circumstances, Dexus expects an FY21 full year distribution per security amount that is consistent with FY20.'

In fiscal 2020 Dexus paid out 50.3 cents in security in distributions, for reference.

Woodside Petroleum

2020 proved to be a dramatic year for oil markets, with the all-important commodity plunging into negative territory in April.

'I would rate the external conditions created this year by COVID-19 pandemic and oversupply in global oil and gas markets as the most difficult I've seen in nearly four decades in the industry,' Woodside's CEO, Peter Coleman said during the company's H1 2020 release.

Despite that, Woodside declared an interim dividend of 26 US cents per share, down from 2019's interim dividend, but still leaving the oil major's dividend yield hovering above 5%.

Origin Energy

Despite the fact that macroeconomic conditions remain unfavourable for Origin, the company paid a ‘stable’ dividend in 2020 (25 cents per share), implying an impressive dividend yield of 5.10%.

Moreover, with Origin eyeing underlying earnings (EBITDA) of between $1,150-1,300 million and a free cash flow (FCF) yield of 12-15% in FY21, the company said it expected a 'Dividend payout of 30-50% of Free Cash flow – a mandate which remains unchanged from the year prior.

On that key metric, in 2020 Origin’s FCF improved 7%, hitting $1,644 million, implying potential stability for the company’s upcoming dividends.

Rio Tinto

Like FMG, Rio Tinto has seen its operational performance improve dramatically off the back of a buoyant iron ore market.

Indeed, during Rio's most recent half-yearly results, the miner generated some US$9.6 billion in earnings (EBITDA) and paid out US$3.8 billion in the form of dividends to its investors.

Rio has a dividend yield of 4.81%.

As the miner set out in its first-half results:

‘Shareholder returns of 40-60% of underlying earnings on average through the cycle.'

APA Group

Like Dexus and Stockland, towards the back-half of 2020 APA provided the market with interim distribution guidance, at the time saying it expected an interim distribution per security of 24.0 cents – a 4.3% increase on the prior corresponding period’s distribution.

While APA did not provide full year distribution guidance, management noted that 'all distributions will be fully covered by operating cash flows.’

The company has an annual yield just above 5%.

How to trade Australia’s best dividend stocks

An individual can buy, sell and benefit from the ‘Top 10’ ASX dividend stocks we’ve discussed above by purchasing physical shares or share CFDs though IG’s easy-to-use online trading platform.

Click here to sign up for an IG demo account and practice trading dividend stocks now

By buying physical shares investors get the chance to benefit from potential capital appreciation as well as periodically receive passive income in the form of dividends. As alluded to at the start, investors may also have the chance to choose to receive the equivalent cash dividends in the form of stock.

Alternatively, investors can benefit from potential dividend payments and leverage by trading dividend stocks as share CFDs – also using IG’s trading platform. Trading CFDs, like buying physical shares – gives an individual the chance to benefit from higher or lower price movements of an asset. Unlike physical shares however, with share CFDs IG automatically makes an adjustment on equity and stock index positions if a dividend is paid.

Moreover, investors should be aware that while leverage can magnify one’s gains, it can also magnify one’s losses.

How to identify and pick the best dividend stocks

Regardless of whether you trade physical shares or share CFDs, having a step-by-step process to picking the best dividend stocks is important. Here’s how to pick the best dividend stocks in Australia:

  • Use a ‘Market Screener’ to filter out stocks with a high dividend yield. Generally speaking, this means looking for a stock with a dividend yield of 3.5% or more.
  • Next, analyse the viability of the dividend: Does the company have a healthy balance sheet? Are earnings growing? What are its current debt levels?
  • Beyond that, look at the company’s dividend history: here, check to see if the company has grown or paid a consistent dividend over the last five to ten years.
  • Looking to the future: check to see what analysts are projecting over the next 12 months in terms of dividend yield.
  • Finally, see what the company itself has said about the current and future dividends. Often large companies, like the ‘Top 10’ stocks discussed today, will have clear Dividend Policies that are clearly communicated to shareholders. FMG, for example, has stated that it remains committed to paying out 50% to 80% of its full-year profits (NPAT) to investors in the form of dividends.

Risk management and high-yielding dividend stocks

Though the ‘Top 10’ dividend stocks we have discussed today represent a cross-section of well-known Australian companies – investors and traders should not assume that investing in dividend-focused stocks is without risk. As such having appropriate risk management measures is place paramount.

For one, investors should not forget that a company’s dividend yield – no matter how high – is a metric based on the dividends the company has paid in the past, not necessarily the ones it will pay in the future.

Avoiding yield traps

GameStop (NYSE: GME) attracted much interest from investors during the middle of 2019 when its dividend yield hovered around the 15% mark. On this metric alone this stock would have appeared to be a great choice for income-focused investors.

Yet for those who looked a little closer at GameStop, they saw a company in decline, sales were down significantly, the outlook was dour and the company’s share price had been hammered by bearish investors. GameStop, eliminated its quarterly dividend entirely soon after, in an attempt to shore up its balance sheet.

Such an example reminds investors that it’s important to understand that a stock’s dividend yield can rise if the company chooses to pay out a higher dividend or if the company’s share price declines. This means that market forces can artificially prop up or ‘trap’ investors into believing the yield of a company is better than it actually is. Investors therefore should look at the total shareholder returns – that is, a stock’s share price appreciation over a particular period + the total dividends paid out in that period – not just the dividend yield.

In addition to the above, to avoid yield traps like GameStop, investors should ask:

  • Does the company have a history of consistent dividend payments?
  • Has a depressed share price created a distorted dividend yield?
  • And maybe most importantly: is the company in a strong financial position?

Secondly, as IG’s Market Analyst, Kyle Rodda once said: While dividend stocks tend to perform well in low or falling interest rate environments, the opposite often becomes true when interest rates are on the rise. Investors should therefore be aware that ‘in such circumstances, the risk-reward of dividend stocks can change markedly.’

Australia’s best dividend stocks summed up

2020 proved to be an incredibly volatile year for Australian equities. Many dividend stalwarts – such as the Big Four Banks were forced to slash or suspend their dividends in response to updated regulatory guidance and other negative events.

Others, such as FMG, moved from strength to strength, upping their payouts off the back of favourable macroeconomic conditions.

While the surprises 2021 will throw at investors remain unknown, the stocks we have discussed today form a strong starting point for investors and traders interested in better understanding a number of the ASX’s ‘high yielding’ dividend stocks.


This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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