Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 103

High dividend yields support equity returns

Over the past seven decades in Australia the level of ‘real’ dividend yields across the market has provided a pointer to broad stock market rallies ahead.

The ‘nominal’ dividend yield is the aggregate level of dividends for the market over the most recent 12 month period divided by the current market index level. The ‘real’ dividend yield is the ‘nominal’ dividend yield less the current or most recent annual inflation rate. A similar measure also works for the US market. The chart shows the Australian market since 1980 noting the booms and busts.

When the real dividend yield reaches 2.5%, the market has rallied for the next several quarters. This measure considers all of the rallies through the 2000s credit/mining boom, the GFC, the sovereign debt crisis and QE boom, and it has also worked in all prior cycles since World War 2, except in the high-inflation 1970s.

In 2014 the Australian market was flat but at the end of 2014 the real dividend yield once again reached 2.5% indicating the market was likely to rally, and it has indeed risen strongly. At the end of February 2015, the real dividend was still 2.5% (4.2% nominal yield less 1.7% inflation), and this has provided further support to our bullish stance on shares.

Local investment markets are being driven by three main factors – monetary, fiscal and political. On the monetary front the Reserve Bank has had to keep cutting interest rates to try to bring down the dollar and to stimulate business investment. The plan is not working as intended. The dollar is still too high and business investment has stalled. Banks are not lending to businesses and businesses are not borrowing or investing. Lending growth is showing signs of growth but it is mainly housing lending, and investment property lending in particular.

Investment has collapsed in the resources sector (thanks to falling commodities prices, over-supply and weak demand), and it has also stalled in other sectors due largely to political uncertainty and the budget crisis.

Instead the rate cuts have fuelled asset price booms driven by foreign and local investors. Foreign investors have so far not been deterred by currency losses. They continue to chase our relatively high interest rates and yields on bonds, commercial property and shares, which are still high compared to the rest of the world. Local investors are shifting money out of bank deposits and chasing higher yields in ‘risky’ assets at high prices.

The government has been canvassing various measures to cut back spending – eg charging for previously ‘free’ doctors’ visits, counting the family home in assets tests for welfare, and means testing childcare subsidies. The Federal Treasurer has also signalled that a whole range of taxes and tax breaks are on the table for the upcoming May budget - including capital gains tax, negative gearing, franking credits, GST and superannuation tax breaks. These may sound logical and sensible but they will cost votes the government cannot afford to lose. The labour market is weakening, the unemployment rate is rising, wage growth rate is slowing, and inflation is declining.

But for investors, the extraordinarily loose monetary policy (low interest rates) and fiscal policy (budget deficit blowout) are supporting asset prices (shares, bonds and property).

 

Ashley Owen is Joint CEO of Philo Capital Advisers and a director and adviser to the Third Link Growth Fund. This article is educational only and is not personal financial advice, and does not consider the circumstances of any individual.

 

  •   2 April 2015
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Telstra: the dominant player in an improving industry

Doubling down on dividends

How inflation impacts different types of investments

banner

Most viewed in recent weeks

The ultimate superannuation EOFY checklist 2026

Here is a checklist of 28 important issues you should address before June 30 to ensure your SMSF or other super fund is in order and that you are making the most of the strategies available.

Noel Whittaker’s take on the budget

Marketed as a fix for inequality and housing affordability, the latest budget instead delivers a tangle of tax changes that leave everyday Australians worse off.

Australia has no death duties. Technically.

Australia may not levy formal death duties, but a growing web of tax measures is quietly shaping what wealth passes between generations. Now, the 2026 budget adds another layer.

Lithium's rally is real this time – but no-one trusts it

The lithium rally mirrors the early-2010s tech stock surge, with demand set to double by 2030. Supply has been slow to respond, creating a market deficit for future tech like humanoid robotics and solid-state batteries.

Welcome to Firstlinks Edition 662 with weekend update

The debate over the budget is increasingly shaped by frustration and perceptions of unfairness, rather than clear-eyed assessment of policy outcomes.

Two months into retirement

A retirement researcher's take on retirement and her focus on each of her six resource buckets to stay engaged during the transition and beyond.

Latest Updates

Are the government’s CGT changes better for young investors?

New CGT rules promise fairness, but could young investors lose out? A practical scenario reveals how changes impact deposit goals, investment choices, and long-term wealth building for the next generation.

Retirement

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Investment strategies

AI can’t pick winning funds, but it can help you avoid losers

Machine learning has been touted a game changer investment management. But a new study overturns claims that AI can generate positive alpha in mutual funds. Here are some practical takeaways for investors.

Investment strategies

Inflation BIG picture: Boomers got lucky, next Gen not so much

A 150-year view shows inflation's upward bias, driven by shifting monetary regimes and war stocks. This marks an end to the low-inflation boom that enriched boomers and ushers in a higher-inflation era for younger investors.

Planning

Tax deductibility of financial advice improves affordability

A shrinking adviser workforce and rising costs are squeezing access to financial advice, just as demand surges. Expanded tax deductibility offers a modest but meaningful boost to affordability.

Retirement

Retirement in reality – 3 months in

A reflection on travel mishaps, smart decision-making, time pressures and rebuilding health habits. Three months in, here's how to navigate the surprising realities of life after work.

Taxation

Calculating the business cost of Australia’s new 'productivity tax'

Amid a national productivity crisis, new economic analysis finds the tax changes in the 2026 Federal Budget create Australia’s first-ever by design 'Productivity Tax', where young people will pay the biggest price.

Sponsors

Alliances

© 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.