Dividend testing LICs and ETFs

LICs and ETFs are popular thanks to steady returns and low management costs, but how do they compare to simply investing in blue-chips which dominate the ASX 200?

Summary: LICs and ETFs are popular thanks to steady returns and low management costs, but how do they compare to simply investing in blue-chips which dominate the ASX 200?

Key take-out: The dividend returns over the past 10 years from select LICs and ETF have all provided investors with an attractive return, while also increasing in value.

Key beneficiaries: General investors. Category: Shares.

Earlier this year I looked at the dividend returns that came from investing in a number of direct Australian shares since 2004 (see Our top 10 dividend cash cows).

The results were interesting – showing that dividends alone over this period had provided an adequate return for investors over this time. The following table is a summary of those results for the 10 biggest companies that are listed on the Australian stock exchange:

Rank

Company

Jan-04 Price

Number of Shares Owned With $10,000 Investment

Cash Dividends Per Share Since Jan 2004

Total Cash
dividend for $10,000 Investment

1

Commonwealth Bank

$29.52

339

$28.45

$9,637.53

2

Westpac

$15.91

629

$14.36

$9,025.77

3

Woolworths

$11.78

849

$9.86

$8,370.12

4

ANZ Bank

$17.68

566

$13.58

$7,681.00

5

BHP Billiton

$12.15

823

$8.45

$6,954.73

6

Wesfarmers

$26.38

379

$17.75

$6,728.58

7

Telstra

$4.83

2,070

$3.11

$6,428.57

8

National Australia Bank

$29.92

334

$18.14

$6,062.83

9

CSL

$17.78

562

$7.91

$4,446.12

10

Rio

$37.38

268

$15.37

$4,111.82

I have repeated the methodology that I used with individual shares, this time looking at some listed managed investments, to see how well investors had been served by investing in them since January 2004, a period which included the Global Financial Crisis.  Three low cost managed investments have been chosen. First I examine two well known Listed Investment Companies (LICs): Argo Investments and Australian Foundation Investments. Separately, I examined an exchange-traded fund based on the ASX 200: The SPDR S&P/ASX 200 Fund (STW).  The theory is that these three investments are low cost and should have provided an investor with good exposure to the strong income return of the top companies.

The following table sets out the results:

Jan 2004
Share Price

Shares Bought
with $10,000

Cash Dividends
per share

Franking Credits
per share

Total Value
of Dividends
per share

Total Value

Argo $4.62                                                   2,165 $2.51 $1.08 $3.59 $7,761
AFI $3.28                                                   3,049 $2.19 $0.94 $3.13 $9,527
STW (ASX 200 ETF) $33.29                                                      300 $23.13 $5.78 $28.91 $8,684

The dividend returns of all three low cost managed investments have provided an adequate return for investors. The difference in return between Argo and AFI is interesting, however it is worth remembering that LICs can trade at a discount or a premium to the value of their portfolio – and this may have increased or decreased the value of the initial $10,000 investment compared to the value of the underlying investment portfolio at the time.  

The bottom line is this – all three investments provided a strong income return for investors over the period that started in January 2004.  As well as this income return, they all provided investors with attractive capital gains, with the price of all three having increased by between 50% and 100% – the current price of Argo is $7.68, AFI $6.17 and STW $51.90.

A closer look at the numbers also confirms once again the remarkable skew of ASX accumulated returns in recent years towards the banks: As Alan Kohler has noted on several occasions, if you had the major banks well weighted in your portolios in recent years you have been exceptionally well rewarded. If you did not have them or were underweight banks, you would have suffered accordingly. 

Conclusion

There is always a great deal of emphasis on the price movement of shares – however the return from dividends can be attractive, especially in the Australian environment where there is the added bonus of franking credits. 

The individual shares that make up the biggest 10 companies in the market have provided attractive return – including the miners which are rarely promoted as dividend stocks. It was an interesting exercise to see if three low cost listed managed investments would do the same.  The answer – the dividend returns over the past 10 years from Argo, AFI and the STW ETF have all provided investors with an attractive dividend return, while also increasing in value.

The take-out message? These diversified, simple, low cost investments do their job well. (Also see an earlier article I wrote on LICs: LICs with an instant yield booster).

Whether as the core holdings in a portfolio that other investments are built around, or the main individual holding in a portfolio, they have since the start of 2004 provided investors with a very satisfactory return. Whether they can offer very satisfactory returns in a more fractious market where winners and losers may go their separate ways in a higher interest rate environment remains to be seen.


Scott Francis is a personal finance commentator, and previously worked as an independent financial adviser. The comments published are not financial product recommendations and may not represent the views of Eureka Report. To the extent that it contains general advice it has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.

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