Can dividends rescue the Australian share market?

There is little doubt that world markets are in a really tough spot as interest rates follow inflation upwards, with both stubbornly tracking higher than most observers anticipated.

The one consolation for Australian investors is that we seem to be outperforming the major markets on the way down – that is, we are falling less and more slowly.

There are many reasons for that – we lagged behind the technology heavy US market on the way up so it is only fitting that our old school companies are a bit more resilient in the face of widespread falls.

Plus, it wouldn’t be hard to outperform Europe, which faces a world of pain this winter due to the Ukrainian war and the price and availability of energy.

Stellar dividends help to cash up investors

However, one of the more hidden reasons Australia might be showing some resilience is the fact that we pay share market investors such stellar dividends.

Just take the last couple of weeks for example.

BHP (ASX: BHP) paid out what must be one the biggest dividends seen anywhere – a stellar US$8.9 billion (A$13.7 billion) final dividend that took the FY2022 total it paid to shareholders to US$17.9 billion (A$27.6 billion).

Worth noting, this did not include the US$19.6 billion in specie dividend handed out as part of the sale of BHP’s petroleum business to Woodside.

Admittedly, BHP is an absolute monster on the ASX, our biggest company that only got bigger after it closed down its UK joint listing and represents a massive 9.5% of the index.

It is also undoubtedly true that 2022 will probably mark a dividend high-water mark for BHP for some time to come given that commodity prices including iron ore have been drifting lower, although to be fair, could you really expect a global mining company to keep running a dividend yield above 12% – before franking credits?

Even factoring in some softness in BHP’s main business units, on current projections BHP will still be a large dividend payer well into the future.

BHP is in good company as dividends flow

Other big dividends to be paid include $3.7 billion by fellow iron ore miner Fortescue Metals Group (ASX: FMG) on 29 September, Commonwealth Bank (ASX: CBA) which will pay $3.5 billion to shareholders on the same day with solid dividends also forked out by Telstra (ASX: TLS), Rio Tinto (ASX: RIO), Santos (ASX: STO) and, over time, the other big banks.

The important thing to note here is that the many billions of dollars that will steadily be dropping into bank accounts is being paid to existing share market investors, be they institutions including super funds and individuals.

All of these investors can do what they like with that money, but as existing investors they are accustomed to looking at buying more shares – particularly when the tide has gone out a little and share prices are lower than they have been.

Retail investors might decide to spend the money, although even that is a form of economic stimulus that wouldn’t be around without the large dividends in the first place.

On the institutional side of things, the arrival of such large wads of cash greatly reduces the need to cash-up through selling shares, which reduces some of the selling pressure that always accompanies a falling market.

Institutions are likely to progressively invest their cash

Institutions with a bigger than normal wad of cash on the sidelines are sure to go hunting for bargains should shares continue to swoon in the wake of rising interest rates.

All told the estimates for the overall dividends paid in the wake of the August full-year profit results are for a record $33.5 billion, with a further $9.6 billion expected to be paid to investors in October when the last of the dividend payments are made.

That is higher than even last year’s pandemic stimulus pumped up dividend pay-outs and shows that even as the Australian and world economies are in an uncertain place, boards are still confident enough about the future that they are continuing to pay profits out to investors.

Australia pays out big dividends – with a franking bonus

It is also worth remembering that Australia pays significantly bigger dividends compared to most world markets – returns that are boosted further thanks to Australia’s relatively unique system of fully franking the dividends that are paid by companies that paid sufficient corporate tax.

Grossing up dividends to allow for these franking credits still produces returns that are much greater than those on offer on term deposits and government bonds.

Even if companies do pull their horns in a little due to the uncertainty of interest rates chasing inflation higher, the comfortable cushion of fully franked dividends is likely to lead to a softer landing for Australian investors than many of their compatriots in other countries.