The importance of dividends
The ASX 200 index at 31 May 2015 was 5,777 at 31 May 2017, two years later it was 5,724.
So in two years the market has not improved, in fact it has declined by 53 points.
Nonetheless, Blue Chip companies continue to pay healthy dividends, and those healthy dividends have the added tax benefit of franking credits.
During periods of low economic growth, as we are experiencing at present, the importance of fully franked Australian dividends is a cornerstone of most people’s portfolios, particularly baby boomers who are seeking an income stream for when they retire.
However, before you rush out to buy your shares that pay high fully franked dividends you need to consider a number of points.
- What is the dividend payout ratio of the company? That is, whilst we would all like large dividends you do not want the company to pay out a dividend greater than its current year earnings. In such circumstances the dividend appears healthy but the company is eating into its capital and reserves to appease shareholders. HIH and OneTel paid healthy dividends but these two companies are no longer around today.
- Is the company you are investing in making healthy profits from year to year? A company that has consistent earnings is generally in their maturity stage and has established goodwill and branding to maintain these earnings.
- Low debt on the balance sheet of the company. Companies with high debt may from time to time reduce their dividends in order to pay out or reduce their debt. This is typically the case during a financial crisis such as the last Global Financial Crisis or when interest rates rise.
- The Franking Credit. This tax benefit is attached to companies that pay Australian tax. At the time of writing a company such as QBE only has a 50% franking credit whilst a similar company IAG has a 100% franking credit.
As with any portfolio it is very important to consider your Risk Profile and ensure that your investments are spread over a number of asset classes such as property and cash.
Should you have any queries in relation to share dividends please feel free to contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.