Incomes rise for those prepared to hold- 17th March 2003

Barry Dunstan - Australian Financial Review

Slowly but surely investors are beginning to realise that the real measure of their investment returns will soon be showing up as the latest interim dividends drop into their bank accounts or letterboxes.

Around the market the feeling is that, although the December-half interim reports showed double-digit growth, analysts and market traders have been more affected by the cautions that many companies have shown about results for the second half of the year.

Certainly, declines of about 15 per cent in the major indices so far in the financial year are in complete contrast to the experience of many investors. According to the macro figures produced by JB Were, dividends paid increased 17 per cent in the December half-year reports over payouts in the previous corresponding period.

And that followed an estimated 18.5 per cent rise in pay-outs for the second half of the 2001-02 year after a 10 per cent rise in the first half of last financial year.

In fact, that rise in interim dividend was the largest increase for the first half of a financial year since the 1995-96 year, according to JB Were's figures.

The figures also suggest that for the past 18 months company boards have been increasing the dividends paid by a slightly larger margin than the increase in net profits - and doing it comfortably, with the average dividend pay-out cover up about 1.7 times in the latest half year.

So the combination of falling share prices and rising dividend payments has led to substantial increases in average dividend yields in the past eight months.

Since the end of the 2001-02 financial year, the dividend yield on the All Ordinaries Index has risen almost 1 per cent, from 3.65 to 4.63 per cent by early March. In terms of potential income, that represents almost a 27 per cent increase in dividend yield.

While the higher yield technically only applies to those investors who buy now, compared with yields in July last year the estimated increases in dividend payments in the Were figures suggest most long-term investors are also seeing the impact in their actual incomes.

That yield is, of course, much higher on a pre-tax basis. It represents about 6.6 per cent before shareholders deduct their marginal tax rate, compared with just under 5 per cent, pre-tax, on a 90-day bank bill and perhaps a little less on the average cash management trust.

For some sold-off, widely held shares, the increase in effective yields has been substantial, with sharp falls in the share price and, at least in the case of Telstra, an increase in dividend pay-out.

At the end of 2001-02, Telstra shares were yielding just under 5 per cent. With the dividend being paid soon (the shares go ex-dividend on the market today) about $4 a share, shareholders would have received a return approaching 6.5 per cent from the 11¢ final last year and the 15¢ interim this year (including a 3¢ special payment).

From being categorised as a growth stock in its halcyon days, Telstra is now an income stock with a stated yield of around 5.75 per cent at $4.09, though if the board matches the basic 12¢ interim with the final pay-out the yield is 6 per cent.

AMP is another former growth stock which has been cut down to size: it was yielding 4.55 per cent last July but is now yielding about 7.5 per cent (on March 13 prices) following the sharp falls in its shares to new lows.

Commonwealth Bank, which was yielding 4.34 per cent in July last year, has been savaged (despite even a small lift in its interim dividend) and its shares are now yielding more than 6.4 per cent.

The big imponderable with dividend yields is whether the dividend payments can be sustained. In the case of AMP, the stockmarket clearly has its doubts, though CBA might yet be an anomaly among the big four banks.

There's a rule of thumb that boards normally don't increase the interim dividend unless they are reasonably confident of their full-year result and the chance of following through with the final pay-out.

So, while the short-term stockmarket players bemoan the immediate profit uncertainty and major share price indices fall back as stocks go ex-dividend to the current payments, most shareholders are still smiling.

They know that while the market mindlessly frets about share prices, if they are prepared to be long-term holders and hold (rather than sell), their own percentage income returns are rising as dividend payments continue to increase.


Back