Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 251

Three reasons why current dividends matter

Recent headlines on dividends have been primarily focused on the proposed removal of some of the more favourable tax treatments if the Labor Party secures government. While franking credits certainly enhance the attraction of dividends for many investors, we believe there are other reasons why the dividend income earned from an equity portfolio is an important element to consider when constructing an equity portfolio.

There are three key reasons why dividends have always been an important component for investors:

1. Dividends are a more reliable source of return than capital gains

Returns from equities come from two sources – capital appreciation and the dividends received from the shares held.

The returns from the S&P/ASX300 of these two components over the last 20 and 40 years are:

Source: Calculated using IRESS data indices

The importance of the dividend component of an Australian equity portfolio to investors is evident: around half of the returns of the S&P/ASX300 in the last 20 and 40 years have come from dividends.

2. The level of dividends received is not affected by the level of the sharemarket

While the level of capital returns from an equity portfolio over any defined period generally depends on the movement in the sharemarket, the level of dividends is dependent on the performance of the underlying companies, not the movement in share prices.

The level of dividends and the dividend payout ratio of any company is set by the Board of the company. It is generally a reflection of the overall profitability of a company and is independent on the level of its share price.

An investor’s level of dividends from a diversified portfolio – if made up of quality companies with the right attributes – should not vary greatly from year to year and is irrelevant to what is happening on the overall sharemarket, including during price falls.

Over the past 20 years, for the S&P/ASX300, the volatility of capital returns was 12.6% and dividend volatility was 1.0%.

Chart 1: volatility of returns of capital and income of the S&P/ASX 300 over 20 years

Source: IML, S&PASX300 31/03/1998 – 31/03/2018

Chart 1 shows that the volatility of capital returns has been high over the last 20 years, which is not surprising perhaps as it contains periods such as the tech boom and bust, the GFC, and the Eurozone crisis. However, the volatility of the dividends for an investor in the S&P/ASX300 has been very low.

This trend is true also on a year on year basis. Chart 2 shows the breakdown of the level of returns from the S&P/ASX300. The level of dividends paid (the orange bar) has been much less volatile than the level of capital returns (the blue bar) over the last 20 years.

Chart 2: Returns to shareholders over the past 20 years

Click to enlarge. Source: IML and Morningstar Direct, S&P/ASX 300 01/01/1998 – 31/12/2017

Regardless of share price performance, the vast majority of companies in the S&P/ASX300 continue to pay dividends which to some extent compensates sharemarket investors for a share price often beholden to the whims of the market.

3. The dividend yield on stocks can act as a ‘safety net’

The movement in the sharemarket – particularly over shorter periods of 6 to 12 months - is often driven by market sentiment. This in itself is affected by predictions as to the future level of economic activity, inflation, and interest rates, as well as perceptions of geopolitical stability.

Often, minor events in hindsight from an economic standpoint can cause the mood of investors to sour markedly and lead to large declines in the sharemarket. For example, Iraq’s invasion of Kuwait in 1991 led to gloomy predictions about an impending global recession by many market analysts and economists.

A perceived crisis can cause many investors to panic, and the prices of shares can fall heavily initially, often indiscriminately and independent of their quality. Once the panic subsides, companies with sustainable earnings that can support a healthy dividend stream are often the shares that can recover the quickest.

The reason for this is fairly obvious. Rational long-term investors are always attracted to companies that pay a healthy dividend from a sustainable earnings stream. Once shares in quality companies fall to a level where the dividend yield is attractive, long-term investors buy these shares to ‘lock in’ attractive dividend yields, despite a volatile sharemarket.

Conclusion

Dividends provide sharemarket investors with a consistent part of their total return and can also act as a ‘safety net’ in down markets.

While the proposed changes to the tax-effective treatment of dividends in Australia via franking credits is potentially a negative development, dividends will remain an important factor when investing in the sharemarket. They will continue to provide investors with a relatively stable part of returns through the delivery of real cash flow, irrespective of the market cycle.

Fundamentals should remain crucial to deciding which companies ought to be included in a portfolio - mainly the quality and transparency of the earnings, cash flow generation, gearing levels, or balance sheet strength – which ultimately determines the level of dividends.

 

Anton Tagliaferro is Investment Director at Investors Mutual Limited. This information is general in nature and has been prepared without taking into account of the objectives, financial situation, or needs of any investor.

 

  •   3 May 2018
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Doubling down on dividends

The role of shareholder yield in a portfolio

Can you value a share just using dividends?

banner

Most viewed in recent weeks

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Four options for an income investor’s next dollar

What if Australia’s golden age of dividends is ending? Rather than overhaul your portfolio, it may be worth considering where new capital can work harder. I discuss four income strategies and the trade-offs behind each.

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Latest Updates

SMSF strategies

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

The ageing ‘crisis’ has not and will not happen

Rising age dependency is frequently treated as a warning sign for economies. But when actual workforce participation is examined, a strikingly different picture emerges about ageing, productivity and economic sustainability.

Retirement

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Shares

Four charts that expose market concentration risk

Investors have recently been rewarded for backing market leaders, but history suggests this eventually comes at a cost. Now may be the time to review whether your portfolio is carrying unintended risks beneath the surface.

Investment strategies

The case for gearing beyond property

Most Australians gear into property but ignore shares. That may be a mistake. Used carefully, geared equity strategies can enhance long-term returns, reduce cash tied up in growth assets and support retirement income goals.

Economy

Australia's $1 trillion debt pile

The headlines exclaiming that Australian government debt has hit A$1 trillion and US government debt has hit $40 trillion has turned heads, but how serious are they really? Will Australia's mix of debt create challenges?

Economy

Has 100 years of growth made us any happier?

For decades, GDP has been the benchmark for economic success, but has it made us materially happier? If happiness does not rise in lockstep with prosperity, are we overlooking what constitutes a successful society?

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.