Predictable bank yields attract sell-side

Continuing volatility in the equity market has prompted some analysts to argue that investors should give up trying to pick stocks that will deliver capital growth and aim, instead, for stocks that can be expected to produce consistent dividend yields.

Macquarie Private Wealth has issued an equity strategy report, Earnings and Dividends You Can Depend On, that says: "In the current environment, where the delivery of earnings is highly uncertain, given shorter, sharper economic and market cycles, dividend yield is an increasingly important component of returns.

"With capital returns hovering around zero, yield has contributed all of the total returns for investors during the past five years."

Macquarie says equity investors looking for yield need to focus on non-resource stocks. These stocks have higher payout ratios and this is reflected in the fact that dividend yields have delivered 70 per cent of the total return of industrial stocks since the start of the global financial crisis.

Yields have made up 30 per cent of total returns from resource stocks during the same period.

Macquarie searched for stocks that had a reasonable degree of earnings certainty, stable price-earnings ratios and dividend yields above five per cent. It came up with 16 stocks. They include a number of banks and other financial institutions: ANZ, Westpac, Bendigo & Adelaide Bank and IOOF Holdings.

Goldman Sachs focused on dividend yield in its reporting season wrap for the financial sector. It's view is that although there is some downside risk to sector earnings, companies should be able to maintain yields of seven to eight per cent.

Its report said: "Overall, consensus earnings were revised, with mild downgrades across the sector. However, given the volatile state of equity markets and continuation of macro uncertainty, the sector offers a high dividend yield without the need for capital raisings."

NAB is Goldman's preferred big bank stock. Its strong growth in market share over the past year, if continued, offers the best prospect of "upside" among the big banks.

Goldman upgraded Bank of Queensland to a buy in August, based on what it saw as an attractive valuation.

On the buy side, AMP Capital Investors' head of investment strategy, Shane Oliver, issued a commentary saying the turmoil of the past month has provided a reminder that investors are in an investment environment of constrained capital growth and increased volatility.

Oliver said: "The yield an investment provides will be a major component of returns. Focusing on investments that offer a decent and sustainable yield provides greater certainty of return.

For all S&P/ASX 200 stocks, the average dividend yield is around 4.7 per cent. When gross up to a pre-tax equivalent to take account of franking credits the yield is 6.7 per cent.

Oliver said bank shares were attractive because they were trading on dividend yields that were well above the average.