Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 418

Dividend investors, your turn is coming

The upcoming reporting season will affirm how the global COVID-19 pandemic has impacted businesses and sectors in different ways. Aggregate dividend payments over the next 12 months will likely be back in line with that paid in calendar 2019 pre-COVID. However, the sources of these dividends will be different to previous years.

Dividend conservatism

The Australian equity market has now returned to its pre-February 2020 highs, at least in price terms. For the S&P/ASX200 Index, forward earnings estimates have returned to pre-COVID levels while share prices are, on average, 11% above pre-COVID highs.

Source: Redpoint, Bloomberg

But while the unprecedented fiscal and monetary policy settings are reflected in share prices, corporates have so far been more conservative and held back on dividend payments.

This conservatism in payout ratios has been a double hit for self-funded retirees who have also seen interest payments on cash deposits cut at the same time.

Source: Redpoint, Reserve Bank of Australia

Inclusive of franking credits the ASX200 has delivered an attractive yield relative to term deposits over the long term and especially over the past decade. Driven by underlying economic growth, the resilience and rise in share prices is also a characteristic of dividend payments through time.

Furthermore, Australian corporates continue to favour higher payout ratios due to the Australia’s policy of tax credits associated with company dividends.

This important policy pillar supports the retirement savings system and will enable appropriately constructed equity portfolios to play their part in an effective retirement income strategy. The Australian Government’s 2021 Intergenerational Report is forecasting that over 40% of retirees will be self-funded by 2060, and less than 25% will be drawing a full government pension (versus 50% today).

Source: 2021 Intergenerational Report: Treasury, Australian Government

Dividends returning but slightly different to before

Australia’s mining sector is set to be the star of the upcoming corporate reporting season in Australia. Record profits are expected from companies involved in iron ore mining thanks to record high prices. Companies such as Fortescue, Rio Tinto and Mineral Resources should deliver record dividends in the coming weeks.

Government financial support has ensured that retail spending has remained robust. Retailers such as JB Hi-Fi and Kogan have been beneficiaries and have rewarded investors with growing dividends. Supermarkets have also benefited from the ‘stay-at-home’ thematic, with Coles and Metcash paying a growing dividend stream over the past two years.

Healthcare has also delivered on dividends with plasma giant CSL, protective-wear specialists, Ansell, and equipment manufacturer Fisher and Paykel Health all growing their dividends (albeit this growth has not translated to share price growth for CSL, which currently trades at 20% below its pre-COVID highs).

The IT sector has been a standout winner in the past year driven by the fall in interest rates and the perceived stability in their revenues regardless of whether workers are in the office or at home. Global logistics software specialists Wisetech is on track in 2021 to almost double the 2020 dividend. Similarly, global security specialists Codan has grown dividends by 50% in 2021 versus 2019 levels. Both companies pay fully franked dividends, albeit they are a low yield.

This highlights that income-focused investors need to ensure their income generation also provides some exposure to earnings and dividend growth and not simply focus on high yield alone. Wisetech remains slightly below its pre-COVID highs while Codan trades at $17, more than double its pre-COVID high of $8.

For the banking sector, Australia’s banking regulator, the Australian Prudential Regulation Authority, dropped restrictions that banks limit dividends to 50% of profits in mid-December. This enabled an increased dividend from all four of Australia’s largest banks in the first half of this year. CBA is likely to further increase its dividend in August after being more cautious in February, with the remaining three seeing economic conditions improve in early 2021 before paying increased dividends in May. The rollout of product innovations and divestments in the sector could be a catalyst for earnings growth moving forward.  

On the other side of the ledger, COVID-19 has been devastating for industries such as tourism and travel. After promising signs through the start of 2021, new lockdowns mean it is unlikely that operating conditions will improve soon but investors need to be aware of the potential for mergers and acquisitions as conditions improve.

Just like driving: look forward, not back

Being distracted by a high historic yield can be detrimental to investment outcomes. High yields can often hide low growth, business stress or a failure to properly reinvest to support future growth.

Source: Redpoint, ASX, IHSMarkIt

Research indicates that a focus on historical yield has consistently underperformed the ASX200, and by taking a forward-looking approach to dividend yields, opportunities can be found.

Don't focus only on high yields 

The market goes through phases where dividends and companies that pay dividends are in demand, and other periods when they are not. The past 15 months are a brutal reminder of investor appetite for growth and risk versus cashflow and dividends.

Some income-focused strategies commence with defining an investible universe based on higher dividend yielding stocks. Some strategies start with a specific income style and then seek to identify the highest yielding stocks within that sub-group. This can be rewarding at times when dividend-paying companies are in greater demand but can be harmful to overall returns at other times.

Being constrained to invest in just a subset of the market can also lead to less consistent dividend capture if particular sectors of the market are impacted by a change in business conditions while others are not. This is where risk management and a diversity of stock selection views can deliver an investment edge versus a singular focus on high yield alone.

Different companies pay dividends at different times during the year. There is an opportunity for a dynamic approach to trade across these different times to capture an overall above-average income yield while retaining exposure to higher growth stocks. Of course, investors need to abide by holding period rules to ensure they not only capture the cash dividend but also any tax credits attached.

Source: Redpoint, ASX

Capturing a consistent dividend yield from equities cannot be a set and forget endeavour. Building a portfolio from last year’s best-yielding stocks has delivered above average dividend income but has consistently underperformed the index overall.

The goal for most income-seeking equity investors should be to earn a consistent and above average yield on their capital, including an appreciation of the calendar and industry profit cycles can assist with this goal. While the last year has been one of the most challenging in history, it has also highlighted the opportunities for a more dynamic perspective into how investors should seek to capture income from equities.


Max Cappetta is Chief Executive Officer and Senior Portfolio Manager at Redpoint Investment Management, a specialist investment manager partner of GSFM, a sponsor of Firstlinks. This information is of a general nature only and is not financial product advice. Opinions constitute our judgement at the time of issue and are subject to change, and do not consider the circumstances of any investor.

For more articles and papers from GSFM and its partners, click here.



What is quant investing and why is it different?

Why are some companies vulnerable in 2022?

Why valuation multiples fail in an exponential world


Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates


The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.


Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.


The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.


The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.