Don Hamson
Leading income investment fund manager, Plato Investment Management Limited (Plato), has urged dividend income investors to diversify their sources of yield.
Many income investors, including many retirees and self-managed super funds, focus on the dividend yields of Australia’s big four banks and Telstra, said Plato Managing Director, Dr Don Hamson.
“Investors should be wary of this approach, and concentration, especially given that the share value of these stocks has weakened of late, undermining the capital of investors,” Dr Hamson said.
“Investors should consider diversifying their stock portfolios as there are many other stocks that offer both consistent dividend income and better potential for capital growth. There are dividend paying stocks both here in Australia and overseas.”
Australia is one of the highest yielding equity markets and local dividends rose on average by 11% in the latest reporting season ending August 31 according to Plato analysis of ASX200 companies. Smoothing out the impact of large outliers, the median rise in dividends was 7%.
Of ASX200 companies reporting in August, 68% increased dividends compared to the same time last year, while 15% reduced dividends, with the remainder paying the same dividends per share according to Plato analysis.
“Some of those payments are coming from mining stocks, which are traditionally not known for paying high dividends,” Dr Hamson said.
BHP Billiton and Rio Tinto alone will return $A3.5B to investors in their Australian listed entities in September, lifting their dividends by 62% and 24% respectively versus the same time last year.
Overall Plato estimates that resource stocks increased dividends by almost 40% compared to the same time last year.
Notable cuts in dividends include Telstra, which stood true to its announcement last year of a 29% reduction in dividends, although if one does not count the special dividend, the cut in ordinary dividends amounted to 52%. AMP cut its dividend by 31%, and Fortescue went against the trend in resources by cutting its dividend by 52% as its lower quality iron ore continued to sell at a significant discount to BHP and RIO’s higher quality ore.
While dividends outside the banks and Telstra have been strong, Plato encourages investors to broaden their horizon and look overseas for income.
There are over 650 overseas companies currently paying dividend yields over 4% a year in developed markets. These include well-known major companies such as Royal Dutch Shell Plc and Exxon Mobile Corp. and other lesser-known companies in Europe.
According to Dr Hamson, “there is no shortage of income on offer offshore. Investors just need to know where to look.”
Dr Hamson noted that income seeking pension-phase investors represent a fifth of Australia’s $2.5 trillion superannuation pool and many seek a regular investment income to supplement the government pension. Generating income is one of their top priorities, and for their advisers too.
“It is little wonder that with cash rates and term deposits remaining low, diversified dividend income funds that provide 8 – 9% a year, with low risk coupled with access to capital gain, have been increasing in popularity,” he concluded.