In an otherwise gloomy climate for investing, dividends are giving shareholders a ray of hope.
By · 12 Sep 2012
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12 Sep 2012
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In an otherwise gloomy climate for investing, dividends are giving shareholders a ray of hope.

Almost two-thirds of the big listed companies raised their dividend in the latest reporting season, with $32.8 billion paid out to shareholders in 2011-12.

This is no mean feat when you consider that confidence in China's powerhouse economy is eroding, raising all sorts of tricky questions for Australia.

More to the point, the lift in dividends came when overall earnings per share were down 2 per cent during the year.

So how have companies managed to pay out more to shareholders at a time of falling profits? And, most importantly, can it last?

For the most part, the companies that lifted dividends were non-miners that depend on the domestic economy, rather than the miners, which sell their products to the rest of the world.

Primary Health Care is a classic example, increasing its dividend by 38 per cent to 11? a share.

Some miners, such as Fortescue, managed to raise dividends, but these were fairly rare, and the outlook for miners now looks increasingly grim.

At the time of writing, the price of our most lucrative mining export, iron ore, had tumbled more than 30 per cent in the past two months.

This slump is dragging down the entire sharemarket, because miners make up about a third of the bourse.

However, it's having a much smaller impact on the market's dividend growth. Why? Because most miners pay out a smaller share of profits.

According to AMP, resources stocks give just 37 per cent of their profits back to shareholders as dividends, using the rest to fund investment.

In comparison, the "payout ratio" for industrials is 74 per cent, while banks give back 76 per cent of profits.

This means miners can drag down the ASX 200 but they won't necessarily stop dividend growth across the market.

Therefore, analysts reckon non-mining stocks' dividends can keep rising for as long as the domestic economy remains healthy.

Miners, on the other hand, are much more vulnerable.

If global prices stay in the doldrums, CommSec analysts have said, BHP Billiton earnings could be 23 per cent lower than expected, while Rio's could be 41 per cent lower.

Fortescue could fail to make a profit altogether if prices do not bounce back. In short, don't bank on dividend growth from the miners.

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