Ready to eat dividends?

Alastair MacLeod

Wheelhouse Partners

Australian equities are likely to underperform the world market over the next five years, according to the Blackrock Investment Institute. Local market returns are expected to average 4.5% over these years, compared with 6% for US markets, and 9% for Europe.

Fig 1: Blackrock five-year return forecasts (Data as of 24/1/22)

Source: (VIEW LINK)

While we have chosen to focus on Blackrock’s estimates (for those interested, their interactive website is excellent), the forecasts are similar to those of other major global fund managers and asset consultants. Put simply, it’s hard to be bullish when most believe we’re entering a global tightening cycle.

If these forecasts are accurate, the reality for many Australian investors is that dividends will make up nearly 100% of expected total returns from equities over this period. Capital growth would likely prove negligible, as the positive effects from earnings growth are largely offset by falling valuations (as rates rise, valuations typically fall).

We also highlight that these are nominal returns, meaning they don’t allow for the effects of inflation. Once inflation expectations for the different regions have been added, expected growth falls by an average of 3% across the board.

For Australian investors, the value of fully franked dividends that can grow in real terms just became more important. In the chart below, we’ve also included the expected value of franking to Australian investors who can utilise this tax benefit. 

Fig 2: Five-year return forecasts - inflation changes the picture

Source: Blackrock Investment Institute forecasts, Bloomberg, Wheelhouse. Averages used to est 5-year breakevens as at 10/5/22.
Source: Blackrock Investment Institute forecasts, Bloomberg, Wheelhouse. Averages used to est 5-year breakevens as at 10/5/22.

A new way to increase your dividend exposure in your portfolio

If dividends are going to be the the primary source of return the next few years, then one way to improve outcomes may be to focus on strategies that target higher dividend income as a primary source of investor return.

As we have written in recent wires, the challenge for investors remains how to access this potentially higher source of income-driven return, without introducing other unintended risks into investors’ portfolios. 

In this environment, the Wheelhouse Australian Enhanced Income Fund, which aims to double the fully franked dividend yield of the ASX200, may well prove a good starting point for real return generation in an otherwise low growth market.

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Can dividends deliver outperformance?
Disclaimer: This communication has been prepared by Wheelhouse Investment Partners Pty (ABN 26 618 156 200), a Corporate Authorised Representative (CAR 001253586) of Lanterne Fund Services Pty Ltd (ABN 49 098 472 587) AFSL 238198. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. Past returns are not an indicator of future returns. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The product disclosure statement (PDS) for the Wheelhouse Global Equity Income Fund, issued by The Trust Company (RE Services) Limited, should be considered before deciding whether to acquire or hold units in the fund. The PDS can be obtained by calling +61 7 3041 4224 or visiting No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital.

Alastair MacLeod
Managing Director and Portfolio Manager
Wheelhouse Partners

Wheelhouse Partners is an independent asset manager with a speciality in risk-targeted investing. The firm manages two funds with two very different risk objectives; one a Global absolute return strategy and the other an alpha-seeking Australian...

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