Reducing payouts. The recent 4Q08 results season has thrown up some surprises on the dividends front, as a number of high yielding stocks have slashed their payouts. ComfortDelgro, for example, only dished out 52% of its earnings, a far cry from the over 80% payout in previous years. Others like Keppel Corp, SembCorp Industries and SembCorp Marine have also reduced their distribution to shareholders. Companies are now piling up on their cash due to tight credit markets and M&A opportunities. There are even a number which are thinking of offering scrip dividends to shore up cash.

Yield trends. We believe dividend payout ratios will be similar to FY08’s across most industries, given that most have already cut them last year. What will take the wind out of the yields will be declining EPS, as we expect the market to fall some 14%. 77% of our “dividend stocks” universeis expected to see decline in yields, falling from an average of 6.6% in FY08 to 5.4% in FY09.

Gearing not a big issue. A look across the high yielding sectors show that most are not plagued with high gearing, save for Telecommunications. But that is due largely to capital management over the years and payouts will continue to be strong. There may, however, be some concerns over financing (and refinancing) for some of the smaller O&M and REIT players.

REIT and Finance lead the decliners. From our estimates, we believe the cutbacks in yields will be most severe in the REIT and Finance sectors, which are expected to fall 3.4 ppt and 2.9 ppt (Finance sees the largest fall on percentage terms). Other sectors which will likely see weaker yields include Multi-Industry (-1.7 ppt), O&M (-0.9 ppt) and Healthcare (-0.4 ppt).

Preferred defensive plays. Land Transport is the only sector that will see yields perk up, growing to 5.0% in FY09, albeit from a low base of 4.3% in FY08. Telecommunications sector also continues to be resilient, with yields falling marginally from 7.7% in FY08 to 7.4% in FY09. We are OVERWEIGHT on both sectors, with top picks being ComfortDelgro and StarHub. Other high yielding stocks we favour include A-REIT and ST Engineering.