For those living from their personal investment wealth, record
low interest rates are forcing investors to make decisions
impacting lifestyles by taking risks they otherwise wouldn't,
facing returns which are being eroded by higher prices of goods
(inflation) or leading a lower standard of living. This is a global
At the time of preparing this report, the Reserve Bank of
Australia set the official cash rate at 2.5% while 6-12 month term
deposits are paying approximately 3.6%. These rates are less than
compelling and put pressure on investors to seek other avenues of
Taking this into consideration, the chase for income has only
intensified in the last couple of years, with highdividend stocks
having emerged as the chief focus for many investors.
Australian companies are generally reporting modest results amid
difficult operating conditions. Many are focused on driving out
costs as sales growth remains weak. In the post GFC world, most
sectors in the Australian stock market that have outperformed have
been those which have larger dividend payments. In particular,
banks and telecommunication companies have been major beneficiaries
of the demand for higher-yielding stocks.
This is highlighted by the performance of the All Ordinaries
Index which summarises the movement in share values of
Australia's largest companies and the All Ordinaries
Accumulation Index, which also incorporates dividends paid by the
companies. As illustrated in the following chart, the All
Ordinaries Accumulation Index (including dividends) has recovered
to pre GFC levels whereas the All Ordinaries (prices only) has
Receiving a portion of your total return in the form of a
dividend presents investors with two choices:
It can be taken as cash and spent; or
It can be reinvested for potential growth and further return
It is important to recognise that yield is not a measure of
income receipt. Yield merely compares the income generated from an
asset through time. The dividend yield is a function of an
investment's price. A high dividend yield could just indicate
that the stock is cheap, and in some cases cheap for a reason.
A "yield trap" refers to companies that promise high
dividends without the cash flow to support the payments over time.
Sometimes the dividend yield gets so high it is the market's
way of saying it does not believe the prospects for the company are
sustainable. Using historic dividends can also distort yields; if a
company is reducing rather than increasing dividends, yields can
appear higher than what should be expected in future.
As an example, Telstra Corporation Limited (TLS) is referenced
as a high yielding stock. The company has seen flat earnings per
share growth, leading to a stagnant dividend payment since 2005.
This is illustrated in Figure 11 (over page).
Strong cash profits to support dividend payments are what
matters over the long-term. Dividends are proof that companies are
making profits, with growth in profits protecting the
sustainability of the dividend which should ideally grow over time
Companies that exhibit growing profits over time, generally
exhibit increased in share price and are sometimes less volatile.
Recurring earnings also allows a company to forward plan two or
three years with reasonable transparency. The broad industrial
sector has provided more favourable earnings per share certainty
versus resources especially from businesses that operate staples
franchises (supermarkets), healthcare and the large banks.
As a result of consistent earnings per share growth, Sonic
Healthcare Limited (SHL) has been able to increase its dividend by
210% from 20 cents per share in 2002, to 62 cents per share current
day. This is illustrated in Figure 9 (over page) – for those
simply focusing on yield, these opportunities may be missed.
Sonic is an example of a good dividend growth company yielding
in the order of 3.5% which might be low right now because the
company's earnings are expected to grow in future.
Given dividends represent a
reasonable portion of total returns and wealth creation, it is
important to identify quality companies where there is a strong
correlation between earnings per share growth and dividend
This part will cover the legal position in relation to promotional materials and misleading and deceptive conduct.
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