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Dividends key in low inflation, low interest rate world

Dividends key in low inflation, low interest rate world

Dividends take on greater importance for investors in a low inflation, low interest rate environment.

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.”

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. As the information on this page has been prepared without considering your objectives, financial situation or needs, you should, before acting on the information, consider its appropriateness to your circumstances. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Past performance is not an indication of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.