You must yield to dividend temptation- 19th January 2003

David Koch - Sydney Morning Herald

I'VE said it before, but in these uncertain times it is worth shouting from the rooftops again and again: when investing in the sharemarket, don't underestimate the power of dividends.
Early in the new year, the headlines are dominated by the threat of imminent war in the Middle East and the dangerous games being played on the Korean peninsula. Investment news is dominated by the lacklustre performance of sharemarkets over 2002, particularly in the US, Europe and Japan.

But amid all this doom and gloom, the Australian sharemarket has again been one of the better performers compared with the rest of the world. And within Australia, companies that have been paying a healthy dividend yield have been among the most solid performers.

Why? Because a good dividend yield often indicates a company has good cash flow, financial strength, a low share price or a combination of all three.

While most of us follow the fortunes of our share portfolio each day via share price movements, that dividend cheque twice a year often goes unnoticed. It shouldn't.

With many top 200 companies paying a dividend yield of 4 to 5 per cent, add the impact of franking credits and that yield can jump to an impressive grossed up 7 per cent.

Even though the economy has slowed from the impact of the drought and sluggish overseas economies, major Australian companies are still increasing their dividends to shareholders.

During the profit reporting season, the focus of the tidal wave of results is usually on the earnings; the dividend policy at times only receives scant mention.

So the above list may surprise you. These are major stocks that increased their annual dividends last financial year and the percentage increase in that dividend over the previous 12months.

Investment author and educator Peter Thornhill from Motivated Money, a mate for 10 years, is a self-confessed share investment disciple and believes equities should form the foundation of every portfolio.

He has always claimed share investments are for the long term and short terms drops in values are insignificant for the overall long-term performance of your equity portfolio. But he warns the consistent year-on-year double digit returns we became used to in the late 1990s are a thing of the past. Even so, he believes quality shares will still deliver solid single-digit returns.

That's why he also believes dividends will play a critical role in your portfolio. Up to a 7 per cent grossed up dividend yield is a handy fillip to single-digit price rises.

From the list of companies that increased their dividends, several had a rough trot last year in terms of their share price. Woolworths, for example, is still performing well in a business sense but suffered quite a fall in its share price because it became overheated as one of the darlings of the market. But the fact that it is still producing good profits and increasing its dividend is a comfort to investors over the long term.

Orica needed to lift its dividend to appease long-suffering shareholders who had been dismayed by the company's performance over the past five years. Thankfully the Orica board and management team now seem to have their act together and shareholders are benefiting.

While bank shares suffered, they are still able to produce consistently high dividend payouts and, with listed property trusts, remain a foundation sector in most private investor portfolios for good reason.

Standard response

LAST year's string of corporate collapses and executive scandals got investors focused on the standard of corporate governance adopted by companies they invest in.

When AMP failed to come clean on its UK problems (ignoring disclosure standards), its share price was slashed.

New chief executive Andrew Mohl is lifting the game at AMP but investors will take some convincing.

Telstra's battle with regulators and customers puts pressure on its share price because of the perceived legal risks.

It is becoming clear that corporate laxity parallels poor share performance.

Corporate Monitors, run by Michael Walsh, is Australia's leading researcher of corporate governance standards.

Walsh said the share prices of about 20 major Australian companies with the lowest rating have fallen about 12 per cent since October 1, 2001, compared with the ASX 200 index, which fell just 2 per cent.

Float, don't sink

THERE were few new (and fewer profitable) share floats last year and this year is looking similar.

Tony Holley, of new-listing monitor Float Tank, said investors should hold out for the float of AAMI Insurance the highlight of this year's listings.

When assessing a float, Holley said, ask:

Is the model sound?

Is it usually profitable?

What is the depth of management?

What are the economics of the industry?

Can the business grow?

Why are owners selling?

What will the money being raised be used for?



COMPANY DIVIDEND
INCREASE
(%)
Orica.............................. 174
Macquarie Goodman LPT..... 100
OPSM.............................. 40
Foodland Associated........... 30
Woolworths...................... 25
Cochlear.......................... 24
Tabcorp Holdings............... 23
Telstra Corporation............. 15
ANZ Bank.......................... 14
Ridley Corporation.............. 12
Simsmetal......................... 12
Commonwealth Bank............ 10
Publishing & Broadcasting...... 5
Spotless Group.................... 5


Back