Beat the bank account
- By Martin Roth
- Investing
- Unrated
Martin Roth
Martin Roth is a regular contributor to Business Day for Fairfax Digital Media
View all articles by Martin RothBeat the bank account
Investors seeking a reasonable return on their money in 2009 would appear to have few choices. Bank interest rates are falling and the property and stock markets remain weak and volatile. However, the sharemarket crash means many blue-chip companies are offering attractive dividend yields (the dividend as a percentage of the share price).
An analysis earlier this month by the Bloomberg news service found Australian stocks were paying an average dividend yield of 6.8 per cent - more than any other major market in the Asia-Pacific region.
Further, thanks to our system of dividend franking, investors can often expect grossed-up yields - the dividend plus taxation benefits - of 9 per cent or more. This is historically a high figure for Australian shares and, on the face of it, appears to present a rare opportunity for investors.
Nevertheless, the experts are quick to point out that dangers are also at hand. The most obvious is the lack of certainty about the direction of share prices.
Despite the big falls, few analysts are prepared to declare they will not drop further. The other pressing concern is whether companies will be able to maintain their dividend payouts at the levels of recent years.
"When corporate profits are rising, historical dividend yields are a pretty reasonable sort of guide for future dividends," says Ron Cameron, senior research analyst at Ord Minnett. "But in the current market, when the economy starts to tail off and corporate profits come under pressure, you have to take historical dividend yields with a bit of a grain of salt. A lot of analysts are now starting to downgrade their earnings and dividend forecasts. So relying on historical yields can be a trap for the unwary investor."
It is expected that the series of mid-year and full-year corporate financial results, due to be released by the end of next month, will better clarify the extent to which dividends will be cut. However, there is a feeling in the market that, for a variety of reasons, dividends this year could be 20 to 30 per cent lower than last year.
"Has the market factored that into share prices?" Cameron asks.
"I think probably to some degree it has. But there are always surprises and if any company surprises on the downside the rest of the sector, and possibly the rest of the market, gets tarred with the same brush. The market doesn't like negative surprises."
Elio D'Amato, chief executive of the market information and funds management company Lincoln Indicators, says looking for dividends is an effective means of riding out uncertain times on the sharemarket.
"However, to give yourself the best chance to benefit, you need to analyse the company," he says. "Look at its earnings profile and its current business structure to help you determine its likelihood of at least maintaining its dividends in the near term.
"For our clients who are looking for solid dividend payers we are recommending well-established businesses with diverse revenue streams that have achieved consistent earnings growth for a number of years. And ultimately they need to be expected to grow into the future because it is growth from which dividends are paid."
He believes that for a longer-term investor the prevailing high-dividend yields of the banking sector could prove to be a good opportunity. But he warns against property trust companies, which are also offering high yields. "We don't think the full impact of asset write-downs has been felt yet. There is a lack of certainty at the moment."
He also notes that companies, such as the banks, that have traditionally paid high yields "are loath to decrease dividend payments because they know it is such an attractive element of their shares as an investment proposition".
"So provided the Earth doesn't fall in, they do try as a rule of thumb to pay those dividends, although, of course, there are no guarantees, particularly in this environment," he says.
Ord Minnett earlier this month had buy recommendations on a number of stocks, including two large companies offering attractive dividend yields - OneSteel, with forecast yields of 8.5 per cent this year and 10.7 per cent next year, and Centennial Coal (12.7 per cent and 7.6 per cent respectively). All were forecast to be fully franked.
Jeremy O'Gorman, an investment adviser with Joseph Palmer & Sons, believes the high dividend yields currently on offer are going to entice investors back to the market.
"A lot of people are hesitating because they fear share prices might go down in the short term and so are keeping their money in the bank or under the mattress," he says.
"But eventually that high yield rate will drag people into the market because they will be earning next to zero in the bank. Even if you take a haircut of 20 per cent or 30 per cent on falling dividends you are still going to be better off than having your money sitting in the bank. And, with the combination of low price-earnings ratios and high dividend yields, the market will improve.
"If you take a three to five-year outlook you would believe that share prices would appreciate."
An analysis earlier this month by the Bloomberg news service found Australian stocks were paying an average dividend yield of 6.8 per cent - more than any other major market in the Asia-Pacific region.
Further, thanks to our system of dividend franking, investors can often expect grossed-up yields - the dividend plus taxation benefits - of 9 per cent or more. This is historically a high figure for Australian shares and, on the face of it, appears to present a rare opportunity for investors.
Nevertheless, the experts are quick to point out that dangers are also at hand. The most obvious is the lack of certainty about the direction of share prices.
Despite the big falls, few analysts are prepared to declare they will not drop further. The other pressing concern is whether companies will be able to maintain their dividend payouts at the levels of recent years.
"When corporate profits are rising, historical dividend yields are a pretty reasonable sort of guide for future dividends," says Ron Cameron, senior research analyst at Ord Minnett. "But in the current market, when the economy starts to tail off and corporate profits come under pressure, you have to take historical dividend yields with a bit of a grain of salt. A lot of analysts are now starting to downgrade their earnings and dividend forecasts. So relying on historical yields can be a trap for the unwary investor."
It is expected that the series of mid-year and full-year corporate financial results, due to be released by the end of next month, will better clarify the extent to which dividends will be cut. However, there is a feeling in the market that, for a variety of reasons, dividends this year could be 20 to 30 per cent lower than last year.
"Has the market factored that into share prices?" Cameron asks.
"I think probably to some degree it has. But there are always surprises and if any company surprises on the downside the rest of the sector, and possibly the rest of the market, gets tarred with the same brush. The market doesn't like negative surprises."
Elio D'Amato, chief executive of the market information and funds management company Lincoln Indicators, says looking for dividends is an effective means of riding out uncertain times on the sharemarket.
"However, to give yourself the best chance to benefit, you need to analyse the company," he says. "Look at its earnings profile and its current business structure to help you determine its likelihood of at least maintaining its dividends in the near term.
"For our clients who are looking for solid dividend payers we are recommending well-established businesses with diverse revenue streams that have achieved consistent earnings growth for a number of years. And ultimately they need to be expected to grow into the future because it is growth from which dividends are paid."
He believes that for a longer-term investor the prevailing high-dividend yields of the banking sector could prove to be a good opportunity. But he warns against property trust companies, which are also offering high yields. "We don't think the full impact of asset write-downs has been felt yet. There is a lack of certainty at the moment."
He also notes that companies, such as the banks, that have traditionally paid high yields "are loath to decrease dividend payments because they know it is such an attractive element of their shares as an investment proposition".
"So provided the Earth doesn't fall in, they do try as a rule of thumb to pay those dividends, although, of course, there are no guarantees, particularly in this environment," he says.
Ord Minnett earlier this month had buy recommendations on a number of stocks, including two large companies offering attractive dividend yields - OneSteel, with forecast yields of 8.5 per cent this year and 10.7 per cent next year, and Centennial Coal (12.7 per cent and 7.6 per cent respectively). All were forecast to be fully franked.
Jeremy O'Gorman, an investment adviser with Joseph Palmer & Sons, believes the high dividend yields currently on offer are going to entice investors back to the market.
"A lot of people are hesitating because they fear share prices might go down in the short term and so are keeping their money in the bank or under the mattress," he says.
"But eventually that high yield rate will drag people into the market because they will be earning next to zero in the bank. Even if you take a haircut of 20 per cent or 30 per cent on falling dividends you are still going to be better off than having your money sitting in the bank. And, with the combination of low price-earnings ratios and high dividend yields, the market will improve.
"If you take a three to five-year outlook you would believe that share prices would appreciate."
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