SMSF investors must now consider diversifying their portfolios as there is no shortage of stocks, both in Australia and overseas, that offer consistent dividend income and better potential for capital growth, an investment manager has said.
According to Plato Investment Management managing director Don Hamson, dividend income investors need to diversify their sources of yield as many SMSFs and retirees tend to focus on the dividend yields of Australia’s big four banks and Telstra.
“Investors should be wary of this approach and concentration, especially given that the share value of these stocks have weakened of late, undermining the capital of investors,” Hamson said.
Australia is one of the highest-yielding equity markets and local dividends rose on average by 11 per cent in the latest reporting season ending on 31 August, according to Plato’s analysis of ASX 200 companies.
Smoothing out the impact of large outliers, the median rise in dividends was 7 per cent.
Of the ASX 200 companies reporting in August, 68 per cent increased dividends compared to the same time last year, while 15 per cent reduced dividends, with the remainder paying the same dividend per share, the analysis found.
Hamson said some of those payments came from mining stocks, which are traditionally not known for paying high dividends.
BHP Billiton and Rio Tinto alone will return $3.5 billion to investors in their Australian-listed entities in September, lifting their dividends by 62 per cent and 42 per cent respectively compared to the same time last year.
Overall, Plato estimates resource stocks increased dividends by almost 40 per cent compared to the same time last year.
Notable cuts in dividends included Telstra, which stood true to its announcement last year of a 29 per cent reduction in dividends, although if the special dividend is not counted, the cut in ordinary dividends amounted to 52 per cent.
Meanwhile, AMP cut its dividend by 31 per cent and Fortescue went against the trend in resources by cutting its dividend by 52 per cent as its lower-quality iron ore continued to sell at a significant discount to BHP’s and Rio’s higher-quality ore.
While dividends outside the banks and Telstra have been strong, Plato encouraged investors to broaden their horizons and look overseas for income.
The manager said there are over 650 overseas companies currently paying dividend yields over 4 per cent a year in developed markets.
These include well-known major companies such as Royal Dutch Shell and Exxon Mobile Corp, as well as other lesser-known companies in Europe.
“There is no shortage of income on offer offshore,” Hamson noted.
“Investors just need to know where to look.”
He added income-seeking pension-phase investors represent one-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, he said.
“It is little wonder that with cash rates and term deposits remaining low, diversified dividend income funds that provide an 8 per cent to 9 per cent a year return, with low risk coupled with access to capital gain, have been increasing in popularity,” Hamson noted.
