Danger Money: Why a big dividend isn’t always good

Are ASX blue chip companies with dividend yields over 5% really an attractive option? On face value, it may seem like a sensible way to secure a future income stream – especially when bank deposits pay interest of around 2.8%. But should investment decisions be based on the dividend that a particular stock is likely to pay? When talking to some Australian companies about the rationale of their current dividend policy, a recurring theme keeps emerging. “We cannot cut our dividend because our long-term retail investors rely on them for income.” The potential conflict of objectives between the average age of an ASX company (essentially infinite in the absence of being acquired or going bankrupt) and the tenure of a board member – which is on average 5-6 years – can motivate behaviour that maximises the company’s short-term value to the potential detriment of longer-term value creation. Investors should assess the long-term value of a business without considering the next dividend and if they are really seeking immediate income, consider different asset classes more suited to generating short-term income. (VIEW LINK)