Co-head of Australian Fundamental Equities
It is well-known that Australian equities can provide the potential for strong capital growth over the long-term. However, its dividend yield is often overlooked as a secondary source of return, which can help smooth returns, even in volatile times. Currently, Australian equities offer investors attractive income opportunities and exposure to a broad range of industry sectors that provide growth and diversity within an investment portfolio.
4 things that you may not have known
1. Australia has the highest 12 month dividend yield among the Group of 20 (G20)1 nations
As of 31 March 2014, Australian equities delivered the highest 12 month dividend yield across the G20 equity markets and the highest 10 year average dividend yield at over 4% p.a.
Source: RBA, Bloomberg, AMP Capital Investors as at 31 March, 2014. Past performance is not a reliable indicator of future performance.
2. Australian investors benefit from franking credits
The introduction of dividend imputation in 1987 has provided a strong platform for dividend growth. The dividend imputation system allows investors who have been paid a dividend to receive a personal tax credit (franking credit) since the company has already paid tax of 30% on the dividend. Franking credits can add more than 1% to the post tax return from Australian equities for Australian investors.
3. Australian equities currently generate higher cash-flow than term deposits
The graph below shows that the current grossed up dividend yield2 of Australian equities is 5.8%. This is 2.3% greater than the average one-year term deposit3.
Source: Bloomberg, data as of 30 May 2014. Past performance is not a reliable indicator of future performance. The one-year term deposit rate is based on the average of Australian Banks 1-year Term Deposit Rate which is published by the Reserve Bank of Australia.
4. There has been less volatility in dividends than in cash rates over the past 50 years
Cash and term deposits may provide less income certainty than you think. The chart below shows that over a 50-year period; dividends have been more stable than cash. Based on this, you can have a higher degree of confidence that dividend yields will remain relatively stable and grow with inflation. Unlike term deposits, which in part reflect the cash rate, dividends are generated from company earnings. Many companies price their products and services to incorporate inflationary effects, which are then passed on to investors through dividends. The same cannot be said about cash or term deposit rates.
Source: Bloomberg, RBA as at 31 December 2013, S&P/ASX All Ordinaries Accumulation Index. Past performance is not a reliable indicator of future performance.
With the global economic recovery picking up pace, many Australian companies are in a relatively strong position to achieve future earnings growth and therefore grow their dividends. In the current environment of low interest rates, equities provide greater appeal to many investors than term deposits and cash.
1. Group of 19 countries and the European Union, with representatives of the International Monetary Fund and the World Bank.
2. Measures the rate of return from dividend payments after taking into account the benefits of imputation credits (franking credits) to the shareholder.
3. As at 30 June 2014
Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.