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Australian shares currently offer some extremely attractive dividend yields. Telstra and Fortescue Metals Group both have a dividend yield above 7 per cent, while the Big Four banks are yielding 5.8-6.7 per cent1. Franking credits typically add another 3 per cent to the gross yield.
For people who rely on income from their investments, it doesn’t get much better. By comparison, the yield on 10-year Australian Government Bonds was 2.74 per cent in April 2018. While the gross rental yield on Australian residential property was 3.7 per cent in the year to April2. Rental yields in Darwin were the highest (5.8 per cent) while the Sydney (3.2 per cent) and Melbourne (3.0 per cent) markets were lowest.
Dividends provide stability
Returns from shares come from a combination of capital gains and dividend income. While the market tends to focus on short-term price fluctuations driven largely by investor sentiment, dividend income is remarkably stable.
Over the past 20 years, dividend income has accounted for roughly half the total return from Australian shares of 8.3 per cent a year. CommSec Chief Economist, Craig James, expects this trend to continue in 2018, with dividends returning around 4 per cent and capital growth 4-5 per cent.
“When companies earn a profit directors must decide how much to pay out to shareholders in the form of dividends and how much to reinvest in the company to grow the business. In the decade of low economic growth following the GFC, companies took a cautious approach and rewarded shareholders with higher dividends.”
As growth picks up, Mr. James says companies are becoming more open to allocating a greater share of profits to growth and capital, but less to labour.
“The focus for share investors should be on selecting companies with quality assets and strong management teams, good growth prospects and sustainable earnings. This is what will determine the future growth in dividends and/or the share price. Relying too heavily on dividends from Australian shares could also mean missing out on opportunities elsewhere.”
Keep an open mind
International shares outperformed the Australian market over the past year and while dividend yields are traditionally lower on overseas markets, Mr. James says more overseas companies are beginning to provide dividends. At the same time, technology is making it possible to invest in assets that were previously inaccessible.
For example, exchange traded funds offer investments in high dividend global shares, leading tech stocks and global property. “It’s important for investors to have an open mind in terms of asset class and returns”, says Mr. James.
While the loss of cash refunds of franking credits would be a blow to many investors, dividends will continue to provide investors with a stable and reliable part of total sharemarket returns. Being adequately diversified as global interest rates normalise is crucial for investors following a period of abnormally low financial market volatility.
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1 As at 3 May 2018, https://www.marketindex.com.au/analysis/dividend-yield-scan-3-may-2018
2 CoreLogic Hedonic Home Value Index, April 2018, https://www.corelogic.com.au/sites/default/files/2018-05/2018-05--CL_INDICES.pdf