Rethinking dividend investing

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Paul Moore

PM Capital

With interest rates near zero, investors need to think differently about dividends. Buying overvalued Australian shares for their dividend is dangerous. Investors can buy the Commonwealth Bank on a price-to-book (P/B) value of over 2 times, to access its expected dividend yield of about 4% in FY22. 

Or they can buy Dutch bank ING Groep NV on a P/B of just under one, and access an expected dividend yield that PM Capital expects will be a high single digit. European banks are on the cusp of a significant dividend recovery as the European Central Bank relaxes its Covid-related restrictions on bank dividends and share buybacks.

As European bank dividends rise in FY22 and beyond, more investors will likely buy these stocks for their yield, driving valuations higher. The recovery in European banks is a long way behind that in the United States and Australia – and just starting, in PM Capital’s view.

Yet there is little talk of European bank dividends in Australia. Or, more broadly, using Australian-based global equities funds to access offshore dividends.

There’s even less talk of using global equities Listed Investment Companies (LICs) on ASX for exposure to rising dividends in Europe and other regions.

Strong FY 2021

A year ago, nearly every global equities LIC on ASX traded at a significant discount to its pre-tax Net Tangible Assets (NTA). Many traded at large double-digit discounts.

The PM Capital Global Opportunities Fund Ltd (ASX: PGF) traded a material discount to its NTA in mid-2020. Today, PGF trades between its pre-tax and post-tax NTA.

The market has begun to realise the opportunity that exists in LICs that seek investment in undervalued parts of the global market, and that also have sufficient retained earnings to pay attractive dividends.

PGF’s underlying portfolio returned 54% in the financial year to June 30, 2021. Since inception in December 2013 to 30 June 2021, PGF’s underlying portfolio return is 156.9%.

In August 2021 , PGF’s board announced its intention to pay a minimum interim dividend of 5 cents and a final dividend of 5 cents in FY22 – for a 10-cent fully franked annualised dividend. This was a 25% increase in PGF’s anticipated dividend over the guidance it provided in May 2021.

With retained earnings of 54 cents a share, PGF reported it had more than five years of retained earnings dividend coverage.

Based on PGF’s recent share price of $1.56 , its dividend guidance implies an annualised dividend yield of 6.4% – or 9.2% per annum after grossed-up for franking credits. That compares to the RBA’s cash rate of 0.1% and bank term deposit rates of 0.25%.

Raising awareness of LIC dividends

The market needs to focus on the potential of LICs that have substantial retained earnings and franking credits and the potential to cover several years of consistent future fully franked dividends.

Anecdotally, investors – particularly those in the pension phase – are taking extra risk in the sharemarket to earn a higher yield to live on. A LIC that has a diversified portfolio and years of future dividends potentially set aside, appeals. Dividend stability has never been so important.

Global equities LICs need to be part of the dividend conversation. As a company, a LIC can draw on retained earnings to pay dividends – thus offering the potential of smoothing future dividend payments.

Also, because global LICs earn profits in Australia and pay corporate tax here, they can generate and replenish franking credits, enabling consistency in fully franked dividends. That is PGF’s expectation if it meets its goals.

The ability to source franking credits through a global LIC is an attraction for Australian investors who might otherwise avoid buying global equities directly due to franking complications.

Different mindset needed

PM Capital’s focus has always been to generate capital growth. We are not an income investor. But from experience, we know that buying undervalued companies at the start of investment cycles can be a forerunner to periods of strong dividend growth.

We know companies with rising dividends inevitably attract investors, driving the valuation – and total return – higher. That could be the case for some companies in the European banking, home-building and energy sectors in the next few years.

It’s encouraging that more financial advisers are thinking about PGF and other LICs for fully franked yield. The next step is encouraging more retail investors to use the LIC structure for franked dividends generated by exposure to offshore investments – and increase their portfolio allocation to global equities.

To that end, PGF in August offered eligible shareholders in Australia and New Zealand the opportunity to participate in the PGF Share Purchase Plan (SPP). The SPP invites applications for up to $30,000 worth of shares per shareholder.

PGF shareholders who participate in the SPP (and continue to hold their shares at the final dividend record date) will be entitled to the 5 cents per share fully franked final dividend (to be paid on 14 October 2021).

Read PGF’s announcements on 12 August 2021 for more information on its upgraded dividend guidance and SSP.

  • PM Capital is the Manager of the PM Capital Global Opportunities Fund Ltd. PGF’s investment strategy is based on PM Capital’s flagship PM Capital Global Opportunities Fund which has over 22 years of benefiting from PM Capital’s long-term focused investment philosophy and process.

Full Dividend Guidance

PGF – Market update with Paul Moore (video)



Paul Moore
Chief Investment Officer
PM Capital

I'm PM Capital’s founder, CIO, first investor in our Global Companies Fund and its portfolio manager since its inception in 1998. Across all of our funds we invest independently, with integrity and in the best interests of of our co-investors.

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