Income Report / Income Report: Three stocks with an average yield above 6% (VUK, CBA, DBI, SIQ, CIP)

Another strong session for the ASX today with the 1% gain taking the 3-day rally from the 6517 low on Monday to 335pts / ~5% as we once again test post COVID market highs above 6800. Today the Real-Estate stocks are catching a bid with the sector storming more than 2% % higher, Bond yields tracked lower overnight and this has prompted money to head back into the yield sensitive areas, although we’re also seeing strong buying amongst the financials, Virgin Money (VUK) leading the charge here up 12%.

We sent an alert this morning to buy Virgin UK (VUK) in the MM growth portfolio with a 4% weighting. Some may not have been filled early in the day with the stock rallying sharply from a $2.57 low to a $2.87 high. While we did get set for the MM Portfolio, we still have orders to fill more broadly.  The highest price we have paid today is $2.66 meaning we have not been in the market since around 10.30am. We like the stock and have an eventual target above $3.50. We will likely complete outstanding orders into the close below $2.80

Virgin UK (VUK) Chart

Overall, the ASX 200 is currently trading up +74pts / +1.10% to 6836

ASX 200 Chart

The Income portfolio dropped -0.45% in the week largely a result of IFL falling 13%, somewhat offset by Smart Group (SIQ) and Transurban (TCL) up 6.68% & 4.27% respectively. The portfolio remains well ahead of its benchmark for the current financial year, up 15.32% vs the RBA + 4% target of 2.48%. Inception to date the portfolio has delivered 6.71% p/a, with around half the volatility of the underlying equity market.

Banks – Earnings revisions have turned positive

Over the last couple of months, it’s been interesting to see the consensus upgrade bank earnings estimates ahead of CBA’s 1H report on the 10th February – the first time since 2015 we’re seeing coordinated upgrades. UBS have the No 1 rated bank analyst Jono Mott who’s coming into the office for lunch tomorrow so we’ll have more to say on the banks after that, however he wrote a note this morning that essentially agreed with the take MM has been suggesting for a while now.

Economic data has consistently been stronger than everyone (including the banks and the banking regulators) thought, UBS think we’ll see continuing momentum across the sector as credit impairment charges reduce plus a few other bits and pieces that will be good for EPS, dividends are capital.

Banks are heavily leveraged to broader economic trends and it seems to MM that these trends are improving and could well be accelerating.  

MM remains bullish the banks ahead of CBA’s result on the 10th February  

Commonwealth Bank (CBA) Chart

Three stocks with an average yield above 6%  

Yesterday the central bank kept interest rates unchanged at 0.10% however they also extended their bond buying program and confirmed that rates would remain low for the next 3 years. Clearly a supportive backdrop for stocks and the market has responded accordingly. With interest rates so low out till 2024 at least, a supportive central bank and a Government primed to support growth through development, it’s no surprise we’re seeing asset prices on the rise.

I’ve been in the markets professionally since 2004 and when adjusting for inflation, holding money in cash is sending investors backwards. That’s a theme I’ve not seen before (not many have!) however it’s having the desired effect,  all but forcing investors up the risk curve from cash into investments, whether it’s property or shares.

At MM we think being invested in this rising asset price environment is important – stick with the trend, it’s clearly up.

Today we’ll focus on 3 income stocks that look attractive to MM, with a skew towards high dividend paying shares. We’ve intentionally focussed on high dividend payers, not because we can earn more from holding them, but because investors can consider risking less capital to get an adequate return. They say cash is king and it still is even when rates are low, but it simply does not put food on the table at current rates!  

By thinking about high dividend paying stocks, or constructing a portfolio of high dividend paying shares, an investor can generate a blended return through a barbell type approach. On one end of the barbell is high yield shares and on the other is cash. In essence, it means investors could ultimately have less exposure to the market which MM expect will be volatile, while still holding decent cash weightings.

For example: An investor has 500k in cash and needs 3% from this, or $15,000 pa. It’s hard today to get a term deposit that pays over 1% for the next 2 years.

To achieve this same level of income via a portfolio of shares with a grossed up yield of 6% (i.e. including franking), an investor would need to invest 50% of the amount in shares and retain 50% of the amount in cash. If the market pulls back and the portfolio also declines, say by 10%, then a 50/50 split between shares and cash would ultimately dip by 5%, which may be tolerable for the income seeking investor that has been forced out of the safety of TD’s.

While investing in equities has more risk than holding cash, the argument we’re making is that by targeting higher yield equities, the amount of exposure to a volatile market an investor needs to take is potentially less.

1 Dalrymple Bay Infrastructure (DBI) $2.06 – 8% unfranked yield

DBI holds the Dalrymple Bay Coal terminal which services Bowen Basin Coal - largely Met Coal used in steel making. This was a recent float out of private equity and it’s struggled on the back of negative headwinds around China taking Australian product. They listed at $2.57 and are now trading down ~20%.

DBI are a $1bn company operating on take or pay contracts, which means that revenue is paid independent of actual throughput of the terminal. In other words, DBI get paid regardless and this capacity is contracted out to existing users to 2028, plus they have 5-year renewal options. There are some other factors that impact revenue but not materially so. This consistent revenue is highly likely to underpin a consistent dividend, conservatively tipped to be around 17c (unfranked) in FY21. That puts DBI on a yield of 8.25%.

MM is bullish DBI for income

Dalrymple Bay Infrastructure (DBI) Chart

2 Smart Group (SIQ) $7.35  - 6.22% grossed yield

We highlighted SIQ in the Afternoon Note yesterday following a broker upgrade, Ords put a buy on the stock with a $7.70 target price. We already own the car leasing and salary packaging business SIQ in the Income Portfolio and it’s starting to grind higher after a fairly lacklustre period. We had Matt Williams in the office from Airlie last year who highlighted this as one of his good value picks. It hasn’t done a lot but is now on the move. SIQ is relatively cheap (15x forward) and is tipped to yield 4.5% fully franked this year, or 6.4% grossed for franking. I’ve actually bought it for my 94-year-old Grandma, rightly or wrongly!

MM is bullish SIQ for income

Smart Group (SIQ) Chart

3 Centuria Industrial Property Fund (CIP) $3.11 – 5.47% unfranked yield

Industrial property has held up well during this recent crisis, highlighting their defensive qualities. When thinking about properties I’m always perplexed when investors double down by owning property directly but also buying listed plays along the same lines, i.e. long investment apartments and buy a unit developer / landlord on the market for instance.

Industrial property however is an area that many individual investors are not necessarily exposed to (I know some clients / subscribers are) and buying this in listed form can often be a good way to go. CIP holds 59 high-quality industrial assets worth around $2.4b. They have a strong tenant base with more than 60% linked to the production, packaging and distribution of consumer staples, telecommunications and pharmaceuticals i.e. essential items.

The stock’s price does very little however the risks around earnings are low. This is a low-risk yield investment that rounds out MM’s 3 picks today.

MM views CIP as a low risk yield investment

Centuria Industrial Property Fund (CIP)


The 3 stocks mentioned above have an average grossed yield above 6%

We like all 3, we already hold SIQ, and prefer DBI then CIP in that order

Have a great day!

James, Harry & the Market Matters Team


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