Interest rates around the world, including Australia, have been falling recently. Where conventional wisdom one year ago was for rising rates, now expectations have factored in domestic rate cuts and falling yields over the next 3 years. Aussie 10-year government bonds are at all-time lows standing at 1.75%. This change in expectations suggests the global economy may be facing some headwinds over the short to medium term as business confidence, geopolitical risks and market conditions deteriorate. Fortunately, for investors, equity market yields remain attractive and have increased significantly in the first half of 2019.
“The current market and political environment is creating a golden opportunity for yield investing”
The increase has been triggered by a raft of proposed tax changes from the ALP that will negatively impact the after-tax outcomes for many Australian investors should they be enacted. Arguably the most controversial is the removal of cash refunds of franking credits about which Plato has written extensively in 2018. This change is not grandfathered and results in an effective 30c in the dollar reduction in the value of fully franked dividends for tax-exempt investors (pension phase SMSFs and very low-income individuals) who will not be able to reclaim franking credits. This proposed change is scheduled to occur on 1st July 2019 which has provided an incentive for Australian tax-paying companies to distribute franking credits on their balance sheet prior to this date so their tax-exempt investors can utilize them. This period may be looked back on in future years as a golden opportunity for yield investing.
During the February 2019 reporting season, a number of companies announced significantly increased or special dividends and Caltex announced a $260m off-market buyback that is due to complete in April 2019. Overall, of the S&P/ASX 200 companies reporting during February, an impressive 78 companies increased their dividends compared with 24 companies who maintained their dividends and 22 who decreased dividends. The median increase was just 5%, but the value-weighted average increase was a massive 56% reflecting the impact of a number of large companies who had significant dividend increases.
This has provided a dividend bonanza for investors during the first quarter of 2019 and Plato expects this to continue into the second quarter. Arguably this process began in the final quarter of 2018 when Rio Tinto and BHP completed $2.6B and $7.3B off-market buybacks respectively, but we believe these were due to each business selling assets and returning the cash generated from these sales to shareholders rather than a desire to get ahead of any tax changes.
Some of the notable dividend changes are quoted in the table* below:
Source: Plato, IRESS
A few points are worth noting:
- BHP also paid a $7.3B special dividend in January 2019, increasing its dividends per share paid by 210%.
- A significant portion of this dividend windfall occurred in the resources sector which are taking advantage of commodity price increases whilst not undertaking significant investment in new or larger mines.
- Woolworths have also flagged plans to return up to $1.7B to investors, including an off-market buyback after the sale of its petrol business is finalised around the end of March.
- The financials and property sectors made up the majority of the dividend cuts and Telstra again cut its dividend, bringing the cut in its ordinary dividend (which was 5c in 1H2019) to 68% from 2yrs ago.
Want to benefit from this windfall?
Plato Investment Management is an Australian owned boutique equities fund manager specialising in maximising retirement income for pension phase investors and SMSFs. To find out more click "contact us" below or visit our website.
As a 'non taxable' retiree I am thinking of borrowing $75,000 short-term to take advantage of imputation credits this year. I am a pension concession card holder and I am therefore able to receive all my imputation credits by way of refund. Can you advise me how to take advantage of this on a one time basis pre 30th June. My imputation credits for FY19 are less than $1000 at the moment.