Dividends are key in a low inflation, low interest rate world

CommSec estimates that around $26bn will be paid in dividends to shareholders from early July to early December 2017, compared with around $24bn a year ago.

In its analysis of the most recent reporting season, CommSec found that of all full-year reporting companies, 91% issued a dividend, up from the long-term average of 86%, but down from the record level of 92% a year ago. 

Of those reporting a dividend, 69% lifted the dividend, 17% cut and 14% left the dividend unchanged.

Major focus on dividends

Online broker CommSec’s analysis shows that dividends have taken on greater importance for investors.

“If you indexed the All Ordinaries index and the All Ordinaries Accumulation index at January 2004 it would show share prices (All Ords) up 75% while total returns have risen by around 313%,” says CommSec Chief Economist Craig James in the report.

“The differential (dividend growth) has especially widened from the low point for shares after the GFC (global financial crisis) in February 2009.”

In recent years, Australian companies have had to compete with heady property markets to secure the affection of investors, says James.

“With share prices seemingly constrained by a range of influences, that puts more onus on companies to offer attractive dividends or support share prices with buybacks.” 

He says companies are more actively weighing up pay-out options, notably whether dividend payments should be maintained, let alone increased over time, as there still needs to be adequate cash maintained for reinvestment in the business and applied to new opportunities, such as entering new markets or engaging in mergers and acquisitions.

Price vs total returns

“The performance of asset classes like property and shares are still largely assessed via price indicators [rather] than those representing total returns.”

In a low inflation, low interest rate environment, investors must clearly pay more attention to total returns on investments, says James.

“The preference of companies to issue dividends - and indeed maintain or lift dividends - will remain in focus,” James says in the report.

“Investors need to determine if this is indeed the ‘new black’. That is, they need to ask if the low inflation/low interest rate world is here to stay.

“If it is, the question is whether companies will continue to be successful in trimming costs, finding new revenue sources and thus making money. If this is the ‘new black’, then investors will need to research more closely about potential winners and losers.”