Wednesday, August 1, 2012

Dividends prove even more valuable in anxious times Read more:

As I have commented a number of times that dividends should provide at least some stability of income vs the pursuit of growth. Aivars Lode

BLOOMBERG group founder and current New York mayor Michael Bloomberg said last February that ''if somebody offers you a guaranteed 7 per cent on your money for the rest of your life, you take it and just make sure the guy's name isn't Madoff''.

The comment sounded more radical in the US than it did here. Until the global crisis, double-digit capital gains were the Holy Grail for US sharemarket investors. American groups that cycled a fair proportion of earnings back to shareholders in dividends were more often than not considered to be bereft of ideas and growth options.

Here in Australia, dividend yield has always been more important. Its central role was cemented in 1987 when the Hawke-Keating government introduced dividend imputation - a tax credit that recognises that dividends are paid by companies out of income that is already taxed, and one that is more valuable in the hands of investors when dividends are high, and company tax is paid at the top rate.

My colleague Ian Verrender pointed out yesterday that the global hunt for yield is creating a mismatch between the value of the Australian dollar, which is holding up, and commodity prices, which have been falling: the Reserve Bank's index of commodity prices fell by 13.3 per cent between August and June, but at more than $US1.05 yesterday the $A was not far from its July 27, 2011, high of $US1.10, and up more than 8 per cent in two months.
Foreign buying of triple A-rated Australian government bonds that has almost halved yields in 18 months helps explain that unusual state of affairs, and the same search for yield is on in our sharemarket, where the big banks and Telstra are the defensive investor's Fabulous Five.

A ''risk-off'' rally like that one that began at the end of last week on reports that the European Central Bank was about to take action to shore up Spain and boost Europe's economic growth in theory makes defensive yield plays such as Telstra less attractive.
There was enough interest in the telco yesterday, however, to carry its shares above $4 for the first time since December 2008, and they have risen by 20 per cent so far this year in a market that has risen by 5.4 per cent overall. Westpac is up almost 17 per cent, CBA is up by just under 18 per cent, ANZ is 15 per cent higher and NAB is up 7 per cent.
Morgan Stanley's estimate is that since 1970 the shares in the MSCI global market index have risen an average of 5.1 per cent a year. The same shares have risen by 8.3 per cent on a total return measure that rakes in dividends, so share price gains have been the biggest contributor to the total gain.

Morgan Stanley US strategist Adam Parker and the MS global strategy team say, however, that the result is skewed by unusually large price gains in the 1980s and 1990s ''that are unlikely to be repeated going forward''.

Over the very long term dividends have accounted for about half the global sharemarket's growth, and they have been a crucial driver of shareholder returns since the crisis everywhere, including here. The S&P/ASX 200 benchmark index of top listed companies hit bottom on March 6, 2009, and is now 35 per cent higher. The ASX 200 accumulation index has risen 55 per cent over the same time, with the 20-percentage-point difference accounted for by dividends.

Dividends always boost returns, of course, but they are much more valuable to investors in markets that are under pressure, as they have been now for five years. The ASX 200 index's 146 per cent gain between March 2003 and November 2007 when the local market peaked became a 199 per cent gain after dividends, for example, a 36 per cent improvement. The same index's 31 per cent price loss since the the end of July 2007 when the markets were tipping into the crisis is more than halved to 14 per cent when dividends are included, and that dividend-enhanced total shareholder gain of 55 per cent since the market bottomed in March 2009 is 57 per cent better than the share price-only return.

The share gains already made by Telstra and the big banks have trimmed their dividend yields, but they are still magnets. Telstra is still on gross dividend of 10 per cent. NAB is yielding 10.15 per cent, Westpac 9.9 per cent, CBA 8 per cent and ANZ 8.6 per cent.
There are other high-yield niches including investment trusts and infrastructure funds, and in a recent report on high-yield shares that looks at yield but also earnings outlooks and balance sheet strength, Goldman Sachs nominates UGL group, Woolworths, Coca-Cola Amatil and CFS Retail Property Trust alongside ANZ as its top recommendations.

The Fabulous Five should remain popular, however. All shares carry price risk, but you could do worse than borrow Bloomberg's post-crisis playbook and lock in some of the quality yields this market is offering.

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