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

Not all income is created equal

The role of shareholder yield in a portfolio

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Retirement

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

2026 is not 1999

The US market looks eerily similar to the dot-com era with soaring AI spending and tech giants dominating returns. But one difference separates today’s boom from the dot-com bubble and it could determine what happens next.

Planning

Taxing time for trusts

Trusts are facing a shake-up, but an overhaul may not be necessary. Families can explore restructuring strategies that preserve succession and the asset protection benefits that have made these structures valuable.

Economy

Why the US economy is stronger than you might think

War, inflation and higher rates were expected to derail America. But has the market got it wrong? Three forces are driving the economy beyond expectations, revealing implications for stock prices and portfolio positioning.

Gold

How much trust is in your portfolio?

Everyone talks about diversifying assets. Far fewer think about diversifying trust. As inflation, debt and market assumptions collide, the question is whether portfolios need greater protection from unexpected outcomes.

Retirement

Retirement in reality - 7 months in

Seven months into retirement, I'm still uncovering surprises. This month was spent reflecting on the slow pace of health change, the myth of neatly scheduled part-time work and the unexpected persistence of retirement guilt.

The new geography of technology leadership

The next chapter of technology may not belong to the companies or business models many expect. As the landscape shifts, some opportunities are emerging in places that remain surprisingly overlooked by global markets.

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.