Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 247

What is happening with LIC dividends?

For investors in managed investments, it is important to focus on the total returns achieved. We use two measures of performance for listed managed investments (or listed investment companies, LICs). They are the ‘share price return’, which reflects movements in the share or unit price of the LIC, plus dividends, and the ‘NTA return’ which measures movements in the NTA after tax but before tax on unrealised gains. We generally refer to this as ‘pre-tax NTA plus dividends’. We prefer this measure as we believe it gives a better indication of the underlying portfolio performance after allowing for cash taxes paid, expenses, and manager fees. These returns can be directly influenced by the manager, whereas managers have limited control over the share price movement.

However, we do recognise that many investors in LICs are looking for attractive, stable and steadily growing, dividends or distributions. In this case, it is important to focus on the profits generated by LICs, as dividends can only be paid out of profits and profit reserves. In this report, we look at how the LIC sector fared in the latest reporting season. We also review the LICs under our coverage that offer the highest dividend yields and assess the sustainability of those dividends.

During the recent reporting season, 21 of the 29 LICs we cover that reported results for the six months to 31 December 2017 increased their profits over the prior comparable period. This reflected growth in income from their underlying portfolios, including higher dividend income and capital appreciation.

LIC dividends remain attractive

The solid profit reporting season was positive for dividends, with no LICs reducing dividends. Of those paying dividends for the half, 16 increased dividends, albeit some were very modest increases, and 10 held dividends steady. Four of the five largest LICs increased dividends with AFI the only one to hold its dividend steady. The sector continues to offer attractive yields with the five largest LICs offering an average yield of 4%, broadly in line with the S&P/ASX All Ordinaries yield of 4.1%. Dividends from the top five are fully franked, whereas the average franking of the All Ordinaries is lower.

In the table above, we have shown the 10 highest yielding LICs in our coverage universe. We have based our calculations on the last 12 months dividends payments. We have included special dividends only if we believe they are paid regularly. In order to be able to pay dividends, LICs need to generate profits. However, it is possible for LICs to pay out more than they generate in profits in a given year by dipping into retained profit or dividend reserves from prior years. LICs can smooth dividend payments to their shareholders by retaining profits rather than simply paying out 100% of earnings each year.

The table above shows our estimates (based on published accounts at 31 December 2017) of the number of years each LIC could retain its current dividend payments without generating any additional profits. We think this is a good indicator of dividend sustainability when markets turn down. Coverage of one means that a LIC could maintain its current dividend payout for one year without generating any profit in the current year. The five largest LICs (not shown in the table above) all have coverage of at least two years, except BKI which has coverage of one year. This means they are well-placed to maintain dividends at current levels unless the markets experience a sharp and prolonged downturn.

Pengana has the highest dividend cover

Pengana International Equities (ASX:PIA) maintains the highest dividend reserves coverage level at six years, which should continue to support its high payout levels. However, we note that given it invests in global shares, maintenance of franking at 100% will depend on its ability to continue to generate sufficient realised profits (on which it pays Australian tax) from its portfolio.

Resources recovery boosts Westoz profit reserves

Westoz Investment Company (ASX:WIC) has significantly increased its dividend coverage over the past six months given strong returns from its portfolio which has benefited from exposure to the rebound in resources. Coverage has increased from 3.3 years to 5.8 years meaning it is well placed to maintain its current dividend of six cents per share. However investors should remain mindful of the fact that, with the portfolio exposed to the West Australian resources driven economy, returns and earnings can be volatile. The board is targeting a dividend of six cents per share for FY2018.

WAM Research maintains strong cover and WAM Active increases cover

WAM Research (ASX:WAX) continues to maintain strong dividend reserve cover at 3.8 years and Perpetual Investment Company (ASX:PIC) has built up strong coverage in its short period since listing. Cadence Capital (ASX:CDM) has managed to increase its reserve cover from one to two years over the past six months.

We note that WAM Active (ASX:WAA), which was forced to significantly cut its dividends in 2015 after becoming too aggressive with it payouts, has rebuilt its dividend cover to a slightly more comfortable level of 1.8 years. This should be able to support its current approach of steadily and progressively increasing its dividend in the absence of weaker market conditions.

Highest yielding LICs have lowest reserve cover

It is worth noting that the two highest yielding LICs, Contango Income Generator (ASX:CIE) and WAM Capital (ASX:WAM) also have the lowest coverage. Provided markets continue to perform reasonably well, we do not see an immediate threat to the dividends from these LICs. However, in a material and sustained downturn, when it is more difficult to generate portfolio gains, dividends would most likely come under pressure.

Continue to focus on total return

We encourage investors to focus on LIC total portfolio returns, not just dividends, and before investing in individual LICs, ensure they meet their individual portfolio needs.

 

Peter Rae is Supervisory Analyst at Independent Investment Research. This article is general information and does not consider the circumstances of any individual.

RELATED ARTICLES

LIC reporting season wrap for 2017

Managing LIC discounts and premiums

The options to gain equity exposure with less risk

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 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. 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.

Website Development by Master Publisher.