Target market leaders, avoid dividend traps - IML's formula for consistent income
While Michael O'Neill, portfolio manager for the Investors Mutual Equity Income Fund, believes that dividends in Australia are unlikely to be cut amid solid economic conditions and robust employment, he is incredibly selective when picking income stocks.
“It doesn't look like the economy is going to struggle or will have a bad debt cycle anytime soon because job vacancies are still quite high”, notes O’Neill, before adding “but we really try and be selective because there's plenty of dividend traps out there.
“There are companies that are paying unsustainably high dividends, not supported by the cash flows.
They might have refinancing for their debt coming up at higher interest rates. They might have cyclical or discretionary earnings through the reporting season”.
Amid the current inflationary environment, O’Neill is also focused on companies that have invested over time to maintain market-leading positions, to justify the pricing power they have the consumers.
He cites companies like Sonic Healthcare (ASX: SHL), Steadfast (ASX: SDF), Suncorp (ASX: SUN) and Orica (ASX: ORI), adding that such companies are reliable dividend payers.
In the following Fund in Focus, O’Neill also explains why income investors are looking to equities, how IML uses basic options strategies to help support the yields the Fund delivers, and the criteria for consistent dividend stocks.
Please note this interview was filmed on 15 May 2024.