BHP versus CBA dividends
I found Scott Francis’ recent article, A steady dividends flow, very interesting, yet puzzling. In the article, Mr Francis suggests that BHP outperforms CBA as a dividend payer. I don’t understand this reasoning. I’m a shareholder in both and I believe the payout ratio of BHP is about 39%, whereas CBA is about 72%. When I was completing my 2009/10 tax return, I was looking at the dividends received. At the time the value of my holdings in both companies were much the same. However, my CBA shares provided double the level of dividends when compared with BHP dividends.
Now, I agree that Mr Francis’ argument is based on units held, whereas my comments are based on the dollar value of my holdings; nonetheless, there is something here I don’t understand.
Scott’s response: Thanks for your letter. What we are really measuring in this article is the growth rate of dividends over the 10-year period. We started with enough shares in each company to generate $1,000 of dividends. Now - here is where the dividend advantage of CBA comes in - it would have cost you less initially to buy the number of shares to generate $1,000 of CBA shares, compared to BHP. However, BHP dividends have increased faster than CBA dividends over the 10 year period we looked at. A piece of broking research that I looked up confirmed this, with the 10 year growth in BHP dividends being 19.7% a year, twice the growth of CBA dividends at 9% a year. I still find the basic finding of the article very interesting - that dividends from shares have recovered so well since the global financial crisis.
Dividends – ex-dividend date and record date
In Ian Verrender’s article How to cash in on bank dividends, he says buying shares 45 days before the ex-dividend date and then selling the day after the ex-dividend date is most lucrative, as the shareholder gets the imputation credits. But later in the article he suggests holding onto the stock at least until the record date to ensure receipt of the cheque. Can you please explain this?
Ian’s response: Technically, whoever owns the stock on the day it goes ex-dividend has the right to the dividend, so holders could sell the following day and argue the dividend is theirs. However, the company usually pays the dividend to the owner on the record date, which is often about five days later. It takes a couple of days for the transfer of stock to take effect. Noting that, I mentioned it would be “safest” to hold on to the shares until the record date to avoid any issues, since there are a couple of days when ownership and entitlement could be subject to challenge. But the research stands. The earlier you buy in the dividend payout season, the better the chance you have of picking up a capital gain.
Pension plans – assets and income tests
I believe Scott Francis’s article on the age pension, Pension plan adds up to better returns, does not appear to go far enough. To qualify, those of pensionable age must satisfy the ‘asset test’ to be eligible for the aged pension, but many pensions are determined by the recipient’s ‘income stream’ rather than the asset test. Which one applies is a mystery. Centrelink can choose either test as the basis for determining the level of part pension. Cynics might suggest it chooses the one providing the lowest entitlement, which seems to me to be an extreme supposition. But it does impact on total cash received after, say, five years. Perhaps Scott might like to comment further.
Scott’s response: Thanks for the letter. There are two tests that are used to calculate your access to some age pension, an assets test and an income test. The one that applies is that one that gives you the smallest amount of age pension. For example, if you were entitled to $500 a fortnight based on your level of assets, and $550 a week based on your level of income, then you would receive the smallest amount, the $500 a fortnight. I have focussed on the assets test in the article, as most (but certainly not all!) people will find that the most restrictive.
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