One of the more interesting questions to consider at the moment is where will dividends earned on the share market go.
Will they be ploughed back into buying more shares, used to prop up spending due to higher prices or invested in cash or bonds due to increasing caution?
It is a vital question even though the available pool of dividends for spending or investment is actually lower this year, with a little more than $32 billion being paid to investors between August and October, down a hefty 24% compared to last year.
If you go back a little further and include bank dividends paid out by the big banks in early July, then dividends fell by a more modest 12% compared to a year ago to $43.6 billion.
Lower dividends predicted to continue
The reduction in dividends this year is expected to continue as companies remain more cautious about preserving cash amid rising prices for salary and material inputs and the boom profits from the COVID period begin to wane.
In general terms, the big miners were cutting their dividends this year while some of the financials – particularly insurers – were boosting their shareholder payments slightly.
Analysts have now slashed their expected dividend payments for the coming year, with the 12-month forward estimated dividend yield for the ASX 200 now down to 4.06%, below the long-run average since 2005 of around 4.7%.
Bloomberg estimates show that the average dividend payout ratio on the index is at near decade lows of 62% compared to 72% before the pandemic, which shows the level of caution being exercised by boards towards keeping more cash on the balance sheet.
Dividends still attractive
Despite the predicted fall in dividends, they remain quite attractive versus bank deposits, bonds and overseas shares because when you add in the benefit of franking credits, the grossed-up dividend yield is still around 5.7%.
While the Australian market in general supports higher dividend payments than most offshore markets, there are some particular reasons for that.
The main one being that the Australian market is dominated by miners and banks which are mainly companies that operate in fairly mature sectors that in general can’t expect to grow at the same rates as technology and other companies.
That means they use larger dividends supported by their strong profitability and cash flows to attract investors – although it needs to be noted that a fairly small number of companies support the dividend yield of the ASX 200.
Indeed, research by Ausbil showed that more than half of the Australian market’s combined dividends come from just eight companies – namely the big banks ANZ, Commonwealth, National Australia and Westpac and the big miners BHP, Fortescue Metals, Rio Tinto and Woodside Energy. That means the dividend performance of the so-called “Great Eight” will play a really significant part in the dividend performance of the broader market.
Still, dividends remain an important source of return for those investing on the Australian market, as shown by the fact that despite there being lower payments this year, about 87% of ASX 200 companies still paid dividends to shareholders.
Where will the dividend cash go?
As to where the dividend cash that has been paid out over the past couple of months will go, that is a question that will also have a bearing on the direction of the Australian market and the demand for shares.
It is often quite clear that a lot of dividend cash is reinvested and has a positive effect on the market, although this year higher interest rates might make that effect less pronounced, especially given the lower dividend payments as well.
Households that are struggling to meet higher costs and particularly elevated mortgage payments are obviously more likely than usual to redeploy the dividend cash to maintain their standard of living.
Still others might be more cautious than usual about investing in the share market and could build up their savings instead, with higher deposit rates an added attraction.
However, there will certainly be those current investors who treat their dividends as a resource to be deployed to grab opportunities on the share market, either in companies they already hold shares in or newer opportunities.
Investors holding a lot of money in the share market will be hoping that the last group is the largest.
