Yield to power of total returns

Dividends can distract

Cuts in interest rates this year will make Aussie share dividends more attractive, but other factors are likely to affect investors’ returns more.

The stock market’s recent run to record highs has lowered its average dividend yield to 4.2 per cent, from about 4.7 per cent in mid-2023.

Share specialists expect solid dividends this reporting season, led by miners and banks, but warn that the tradition of paying higher dividends than offshore markets is holding back capital growth.

IG market analyst Tony Sycamore said the ASX’s traditional 4.5 per cent dividend yield was “extremely attractive” when interest rates were so low a couple of years ago.

Nobody is expecting a return to the pandemic-driven 0.1 per cent Reserve Bank cash rate, but even if the RBA cut from the current 4.35 per cent to 3.85 per cent this year, that would put dividends in a more favourable light, Mr Sycamore said.

Mr Sycamore expects healthy dividends this reporting season and said miners and banks would again be the highyielding stocks to watch.

He said the iron ore price was about $US125-$US130 while “the cost of pulling it out of the ground is close to $15 … and the banks are fairly cozy in their environment”.

Bell Direct market analyst Grady Wulff said earnings forecasts for this financial year were flat, and just 2.5 per cent growth for 2024-25, so dividends were unlikely to rise much soon.

“Any investors expecting interest rate cuts to filter through to dividends will need to understand that this will take time,” she said.

“More importantly, falling interest rates make investing in equities more attractive as rates and the returns on term deposits or cash and fixed interest investments fall.”

Ms Wulff said if interest rates dropped over the next few years, companies with higher debt levels would pay less interest and could have more cash to return to shareholders, but corporate earnings remained the biggest driver of dividends.

Shaw and Partners senior investment adviser Jed Richards said many people focused too much on dividends and not enough on total returns.

“Australian share prices don’t grow as much as international share prices because in Australia they pay out most of their profits in the form of dividends, and don’t have enough money to go and grow the business,” he said.

An example of this was the lower-yielding US market, where the Dow Jones index had jumped from 13,000 to 38,000 since 2007, while the ASX was only slightly higher since then.

Mr Richards said low rates would help the economy and encourage higher profits, lifting dividends eventually.

He said people chasing higher yields could consider bank hybrids or fixed interest that carried less risk than shares.

“The market has pre-empted rate cuts coming and that why shares have rallied,” he said.

“However, the markets may have jumped the gun.”