John D. Rockefeller once said: "Do you know the only thing that gives me pleasure? It's seeing my dividends coming in". Mr Rockefeller was perhaps a little too fond of his dividends, but they are an important component of total equity returns, particularly in a high-dividend-paying market such as Australia's where dividend imputation provides an additional benefit to most investors.
A recent wire by Investors Mutual Ltd disaggregates total equity returns and makes the case for why dividends are more important than many people realize.
Approximately half of the return from the Australian share market has come from dividends, particularly over the last 20 years. It is usually preferable to buy stocks with good yield (not necessarily the highest yield) that also have the capacity to grow the dividend over time.
They are the so-called GARY (Growth At a Reasonable Yield) stocks. The quality of a company’s business model, earnings and cash flows will ultimately determine its capacity to maintain and grow dividends.
Deutsche’s Australian Equity Strategy team recently ran their GARY screen, which sums a company’s grossed-up dividend yield with its 2-year dividend per share (DPS) compound annual growth rate (CAGR) using consensus forecasts.
While the banks and Telstra have high fully-franked dividend yields, their outlooks for dividend growth are subdued. AGL and the infrastructure stocks look better on the GARY metric, but keep in mind that all of them are sensitive to rising bond yields.
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Responsible for identifying domestic and international equity investment opportunities. 25 years of financial markets experience as an equity strategist, economist, analyst, portfolio manager and consultant.