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The top 5 dividend paying ASX stocks

What is dividend yield?

Dividends are the method by which company earnings are distributed to the owners of the company (shareholders). The dividend yield provides a measure of what percentage of your invested capital is returned to you in the form of dividends each year. A high dividend yield implies that you are earning more for each dollar of invested capital. Dividend yields on the ASX are currently very high from a historical perspective however one must be careful of just blindly investing in high dividend yielding companies.

With dividend yield calculated as the total dividends paid over the prior 12 months, divided by the current share price, there are two possible reasons for an increasing dividend yield. The first reason is simply that the company has increased the value of dividend payments. 

“Dividend yields on the ASX are currently very high from a historical perspective however one must be careful of just blindly investing in high dividend yielding companies.”

This could happen because the company is earning more money or because it decides to pay out a larger percentage of its earnings as dividends. The second reason the dividend yield might rise is if the share price falls. Therein lies the trap with high dividend yielding companies, some of them have high yields because their share prices have fallen precipitously. While this may mean that the stock is cheap it could also mean that the company is in serious trouble from which it won’t recover from. The trick with investing in high yielding companies is to weed out the weak ones.

In Australia, dividends can come with attached franking credits, simply meaning that tax has already been paid on the dividends at the company tax rate of 30%. This can mean that the full (gross) value of the dividends is higher than the actual dividend payment by the amount of these franking credits. In calculating the dividend yield, we use the grossed-up dividend amount, meaning that the value of the franking credits is included.

Dogs of the DOW

In 1990 Michael O’Higgins published a book titled “Beating the Dow: A High-Return, Low-Risk Method for Investing in the Dow Jones Industrial Stocks with as Little as $5,000.” The book describes an investing strategy, called the Dogs of the DOW, which involves buying the top ten dividend yielding stocks on the Dow Jones Industrial Average index. The stocks are generally held for a year and then the portfolio is rebalanced to update the portfolio to the latest list of top dividend yielding stocks as a result of dividend yields changing over time.

The strategy has actually been back-tested as far back as the 1920’s with the long term results showing outperformance against the market as a whole. The idea of the strategy is that blue chip companies generally pay a very consistent level of dividends and therefore the high dividend yield would come about as a result of weak point in the business cycle. As the business cycle returns to the boom phase, the prices of these companies should climb faster than the market as a whole.

The Dogs of the Dow website publishes data about the strategy as well as historical performance information. The following table shows a summary of return data for the past 15 years. 

These results show that over the last 15 years the strategy has outperformed both the Dow Jones and S&P 500 by a couple of percentage points. The question is, can this US based strategy be adapted to work on the ASX?

Rivkin’s Blue Chip Strategy

Over the years, many variants of the Dogs of the Dow strategy have emerged. For example, the ‘small Dogs of the Dow’ includes just the top five dividend yielding stocks rather than the top ten. Other factors include the frequency of rebalancing and the period over which to calculate the dividend amount.  Rivkin’s Blue Chip strategy utilises a variant of the Dogs of the DOW that operates on the ASX 50. Our strategy has performed very well since its inception in 2009, outperforming the market in most years. As with almost any investing strategy, it should not be expected to outperform the market in every single year but rather should outperform over the long term. The following chart shows the compounded annual returns for our strategy over the past 6 years.*

Rivkin’s Blue Chip Strategy performance*

*Past performance is no guide to future performance.

One feature of the Rivkin strategy is that it aims to reduce the impact of market timing by recommending four separate portfolios spaced one quarter apart. Obviously the precise time at which you start the strategy can significantly affect the final outcome due to lucky/unlucky market timing. By spacing the entry time throughout a one year period, our strategy aims to reduce the impact of market timing on the performance.

 Current Dividend Yielding Stocks

The list of top 5 dividend yielding stocks can change frequently depending on movement in share prices and therefore the list calculated on any given day can change shortly after. Nevertheless, we have compiled the list of the current top 5 dividend yielding stocks on the ASX 50. For those unaware, the ASX 50 is an index of the largest 50 stocks on the ASX. When I say ‘largest’ this is a slight oversimplification. The index takes into account factors other than just the market capitalisation of the company, such as trading liquidity. Broadly speaking, however, the index can be thought of as the 50 largest companies. The table below shows the current list.