Dividends are great for investors as decent dividends auger well for earnings growth, they provide a degree of security in uncertain and volatile times, they are likely to compromise a relatively high proportion of returns going forward and they provide a relatively stable and attractive source of income.

There are several reasons why you should love dividends.

–     It is well-known Australian companies pay out a high proportion of earnings as dividends. This is currently 75% and it’s averaged around this since the late 1980’s. By contrast in the major global overseas share markets, dividend payout ratios range from 31% in Japan to 49% in the UK.

–     Since the global financial crisis and the dramatic fall in cash and fixed interest markets (term deposits particularly) decent dividends yields provide security.

–     Of the 11.8% p.a. total return from Australian shares since 1900, just over half has been from dividends.

–     As more and more baby boomers retire and their focus will be on income generation, there is no doubt demand for Australian shares paying decent dividends will be well supported over the many years ahead.

–     Retirees are now seeking regular, good income. This is so important. Dividends provide good income. Grossed up franking credits, the annual income flow from dividends on Australian shares is currently around 5.7%.

–     That’s $5,700 a year on a $100,000 investment in shares compared to $3,500 a year on the same investment in term deposits (assuming a term deposit rate of 3.5%).

What about divided imputation?

Introduced in the 1980’s, dividend imputation allows Australians to claim a credit for tax already paid on the dividends in the hands of companies as corporate earnings and effectively boost the average dividend yield on Australian shares by around 1.5 percentage points.

New Highs

The US stock market is currently at an all time high, yet Australian shares are still trading around 20% below their 2007 all-time high.

An investor who put all their money into the market at the peak in 2007 would now be “in the black” if they had re-invested dividends along the way (ASX 200 accumulation index).

Dividends are so important. Not only are they important to the baby boomers who are about to retire, or for current retirees seeking income, they also represent great value for younger investors creating wealth.

 

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David Watkins, has been providing advice to clients since 1987. He is a Certified Financial Planner, a member of the Financial Planning Association (FPA), and Superannuation Professionals Association of Australia (SPAA).Google Plus

Categories: Borrowing To Invest, Financial Planning, Retirement Planning, Self Managed Superannuation   |  Posted on
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