The search for dividends outside the banks-resources cycle: Ausbil

Investors have been encouraged to break away from the banks-resources cycle as the ‘largest dividend players’ and look elsewhere for reliable and stable opportunities, according to new commentary from Ausbil.

Michael Price, Portfolio Manager of the Ausbil Active Dividend Income Fund, said while the four major banks, BHP, Fortescue and Woodside Energy Group were the only companies to pay over half the dividends in 2024, this is unlikely to continue in the long-term.

“Buying a few of the largest dividend payers is not a reliable source of steady income because banks and resources are cyclical and their dividends are likely to rise and fall in unison as economic growth rises and falls,” he said.

“Banks are the most geared companies in the marketplace, and while they are safe in concept, their leveraged loan books are sensitive to the economic cycle and, by definition, so are their dividends. You may remember most of the banks having to suspend their dividends during the global pandemic.

“Resource companies are dependent on commodity prices, which can also be extremely volatile. BHP is still paying a decent dividend, but the interim dividend it paid in the first half of 2025 was only one-third the size of the one it paid just two years ago.”

Price said investors should look towards sectors that are offering “decent dividend yields and modest growth”, such as telecommunications, general insurance, diversified financials, consumer discretionary and real estate investment trusts (REITs).

According to the portfolio manager, companies tied to “long-term thematics that will help drive the growth in their business and earnings” are well looked upon.

“Origin Energy is an interesting study of dividends with three distinctly different parts to the business, variously contributing to yield and growth. The first part is the gas business, which is one of the world’s largest coal seam gas producers. This business is profitable with long- term contracts that provide strong cash flows. These cash flows are enough to pay a decent dividend for the company as a whole and contribute to the yield.

“The second part of the business is the electricity business. Origin’s competitive advantage is that it is both a producer and a retailer. Being vertically integrated allows it to maintain its margins in the face of competition and rising input prices. Interestingly, Origin effectively uses the cash produced by the electricity business for future growth rather than for dividends; that is, it can reinvest in business growth that compounds into further yield and dividend growth.

“Origin is rolling out an internally funded battery capacity that connects to the grid. Batteries are profitable as they can generally recharge for free on sunny days when the grid is full of solar power, then provide that electricity back to the grid at peak times when it is most expensive.

“The third part of Origin’s business model is a digital technology business called Kraken, which optimises energy use for clients. It is part of a company called Octopus that is privately owned. Kraken is a fast-growing tech business success story. It is on track to reach 100 million customers and A$1bn of revenue by 2027. If it was publicly listed, it could trade on similar multiples to other tech companies, and a higher multiple than its parent, Origin.

“At Octopus’s latest funding round in 2024, the whole business was valued at approximately A$14bn. Origin owns 23% of Octopus, which should be worth around A$4bn. But because the business contributes very little to Origin’s profits, the market appears to be ascribing next to no value to it all. This provides significant upside potential to our valuation and is a key driver of future dividend growth.

“When you put it all together, we believe that Origin is a business with strong dividends, earnings growth and an upside to its valuation that can ultimately feed into capital appreciation for investors.”