Lower dividends loom for ASX investors as record share prices redefine yields
Like two sides of the same coin, Australian share market investors need to look forward to lower dividends in the year to come or for a significant pullback from current record share prices.
Should share prices hold at higher levels then it is simple arithmetic that for any given new dollar invested the dividend yield will be lower.
Most brokers are also pointing to 2025 being a more modest year for dividends for reasons other than lofty valuations, which effectively mean investors are prepared to pay more to get the same amount of dividend yield.
Iron ore price to hit dividends
Lower iron ore prices and economic struggles in China are predicted to soften the earnings and dividends from the big iron ore miners – BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG).
Similarly, galloping bank share prices and reasonably flat earnings are likely to deliver new investors in banks shares a fairly modest dividend yield.
Of course, for those who have held their bank or mining shares for a long time their dividend yield is likely to remain very high based on their entry price but for new investors the dividend yield could be below returns available for term deposits.
Index as a whole will yield less
Given the high concentration of the ASX 200 in banks and miners, these conditions are likely to supress the dividend yield of the entire index as well, particularly some businesses struggle to pass on the full effect of rising costs due to weak consumer spending and the impact of higher interest rates.
Such margin pressures may not apply across the board but they are likely to apply to many consumer facing businesses that are feeling the pressure of falling living standards.
The folly of prediction
Of course, it is always difficult and dangerous to predict what will happen in the world economy due to the many moving parts and this applies doubly to the current situation which includes a second and more unfettered Trump presidency in the US and the possibility of trade and tariff wars, particularly with our largest trading partner, China.
The future is inherently unknowable but given the fairly strong pointers, it would seem prudent to dial in a lower than usual amount for dividend income.
That is not necessarily a bad thing, even with Australia’s attractive system of dividend imputation.
The US market operates very successfully with a much lower dividend yield than Australia and the result has been that it performs more strongly on capital gains.
Who knows, perhaps the Australian market is heading in a similar direction and more businesses will retain earnings to invest in future growth rather than paying a large chunk of profits to shareholders in the form of dividends?