A global cyclical recovery underpinned one of the strongest ASX reporting seasons in some time, with forecast earnings growth for the S&P/ASX 200 in calendar 2026 now sitting in the mid-teens.

This is a turnaround from the previous years in which earnings growth was negative for companies in the benchmark index.

The February reporting season was also notable for capital management initiatives with a record $3.4 billion of new or expanded buybacks announced to the market.

“This represents the Americanisation of our capital stack or our free cash flow. Roughly, one third of the S&P/ASX 100 now has some form of capital management,” says John Lockton, Head of Investment Strategy at Sandstone Insights.

Additionally, dividends were upgraded by 2.7%, or $2.4 billion, with BHP (ASX: BHP) and BlueScope Steel (ASX: BSL) accounting for the majority of the rise.

In this environment, Sandstone Insights has identified five income stocks that advisers may potentially consider adding to the portfolios of clients. Its perspective on income takes into account not just stocks that pay a high dividend today. Equally important is the likelihood of a company maintaining a sustainable and growing yield.

BHP (ASX: BHP)

Miner BHP produced one of the strongest results in reporting season off the back of strong commodity prices and the company’s much higher skew towards copper in its business.

“Historically, we think of BHP as the big Pilbara iron ore play, but for the first time, over 50% of its EBITDA is now copper,” says Ryan McCaugherty, Research Analyst at Sandstone Insights.

“The great tailwinds behind copper are really helping drive the BHP share price, as well as just strong production, continual strong execution, and a really strong dividend that has encouraged investors back into the stock,” McCaugherty says.

BHP announced a US73 cent per share fully-franked dividend, which represented a 60% payout ratio versus 50% in the previous corresponding period.

The company has a forecast dividend yield of 3.1% for FY2027.

Challenger 

Retirement products provider Challenger (ASX: CGF) may be a net beneficiary of upcoming changes to reserve requirements for life insurers set by the Australian Prudential Regulation Authority. Coupled with better underlying business performance, this change could drive an increase in the company’s dividends and buybacks.

“On our numbers, there is $1.50 to $2 per share of capital sitting on the balance sheet which can be released to investors,” says Lockton.

“Some of it may be shared with annuitants and used to fund growth plans for the business. But we think the majority will come back to investors in the form of buybacks, special dividends and a higher ongoing ordinary dividend,” says Lockton.

This is a shift for a company which has consumed capital in the past, particularly in times of market crises. Lockton says the propensity for Challenger to go back to shareholders “with cap in hand” in such situations is likely to be much lower with the new capital standards – and there is potential for a re-rating of the company’s earnings multiple over the medium term.

Mirvac

Property developer Mirvac (ASX: MGR) has been oversold on fears that interest rates will rise significantly this year and cause a collapse in housing volumes, according to Sandstone Insights.

It argues Mirvac’s share price rarely sits below $2 for an extended period but, at the time of writing, is hovering around $1.80-$1.90.

Lockton says the company’s residential business plans to release new land in the growth corridors of Queensland, New South Wales and Victoria – which will translate into a strong product line-up from 2026 into 2028.

“The company spoke to the market back in February and indicated it has very strong levels of inquiry relative to the previous corresponding period. So, I suspect there’s an earnings recovery which the market just isn’t giving any credence to. And a dividend yield at 5% looks pretty interesting to me,” he   says.

Transurban

Transurban’s relative valuation could be impacted by headwinds which are now apparent: higher petrol prices and potential rate hikes.

But the longer-term durability of the infrastructure giant’s dividend yield is underpinned by the fact that it’s completely covered by the company’s free cash flow, according to McCaugherty.

“Its guidance is that it will pay 98% to 102% of its free cash flow back to investors,” McCaugherty says.
Sandstone Insights’ view is that a potential short-term increase in petrol prices will prove a minor headwind for the company and that its longer-term outlook remains intact.

Toll roads remain defensive assets, it says, and there is potential for the company to undertake growth initiatives offshore, in countries like the US (which is expanding its road network) and New Zealand.

“Potential M&A upside isn’t quite priced into the stock and the long duration assets owned by the company are inflation-linked as well. The dividend yield is above 5% [at the time of writing], which is rare for Transurban,” says McCaugherty.

Westpac

A company update scheduled for March will give Westpac (ASX: WBC) the opportunity to explain the benefits of its technology spend under its relatively new Chief Executive Officer Anthony Miller.

“Project Unite, a multi-year project, is well underway and the company is likely to start talking to investors about the benefits from a cost and productivity perspective,” says Lockton.

He says it’s unlikely that the update will result in changes as significant as those announced by new ANZ Chief Executive Nuno Matos – but will still prove meaningful for Westpac shareholders.

“I think you’ll see a pathway which will result in another likely round of upwards earnings revisions for Westpac. The major banks aren't cheap, on an absolute or relative basis, but it’s hard to fight earnings momentum .”

“Stronger than expected credit growth has helped margins, and the opportunity for Westpac to reset its cost-to-income ratio remains significant,” says  .

The bank has an estimated 3.9% dividend yield for FY2027.

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This article contains general information for advisers only and does not take into account any individual objectives, financial situation or needs. Sandstone Insights is a registered business name of MST Financial Services Pty Ltd (ABN 54 617 475 180 ASFL No: 500557) are not associated with AUSIEX and the content or any views expressed by Sandstone Insights, MST and its employees do not represent an endorsement, recommendation, guarantee or advice in regard to any matter. NRI and its subsidiaries, including AUSIEX, do not accept any liability for losses or damages arising from any reliance on external parties, their products, services, or material. Past performance is no guarantee of future performance.