Dividends are on the rise with the average dividend across the equity market growing 6.4% over the last six months, according to recent data from Russell Investments, provider of the Russell Australia High Dividend Index (the index).

“This reporting season has shown companies are increasingly confident about their prospects and as a result are more inclined to return capital to shareholders, either via dividends or buy-backs,” said Scott Bennett, portfolio manager for Russell Investments.

The index, which forms the basis for Russell’s High Dividend Australian Shares ETF (RDV), comprises Australian blue-chip companies with a bias towards those that have a high expected dividend yield but also meet other characteristics including: a history of paying dividends; dividend growth and consistent earnings.

Russell has recently completed the semi-annual reconstitution of the index, which involves incorporating the latest reporting season data to rebalance the weightings of stocks within the index according to certain dividend and earnings factors.

Commenting on the outlook for dividends, Mr Bennett said: “The dash to dividends is likely to become an even stronger theme in the year ahead with more companies looking to return cash to shareholders, along the lines of BHP’s buy-back.”

According to Mr Bennett, dividend yields are now looking as attractive as term deposits. The average term deposit is now yielding 6.1% while the average dividend yield across the ASX is now 5.8% grossed up for franking credits, with the index yielding 7.3% grossed up for franking credits.

“The main advantage over term deposits is with Australian equities you get long term growth in dividends and also your capital,” Mr Bennett said. “The recent correction in equity markets has presented a good buying opportunity for longer term investors.”

Strong yielders

The index has seen a number of movements this half including Harvey Norman which has entered the index at a weight of 1.8%. This reflects its attractive 6.7% gross yield and solid dividend growth, although Mr Bennett says Russell index methodology has also taken into account the cyclical nature of its business.

Defensive companies such as Fosters and Coca Cola Amatil have also increased their weighting, as did the banking sector after three of the top four banks posted double digit dividend growth in the past 12 months. “The proprietary Russell index methodology does favour those companies with more defensive earnings characteristics,” Mr Bennett said.

“This half has really shown investors that dividends are on a steady growth path and as a result dividends are going to be a really competitive source of income compared to other investments,” Mr Bennett concluded.

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