The changing face of company dividends

Summary: Over time, dividend income has tended to increase and provide an important buffer against inflation. Internationally dividends have increased in five of the last six years.

Key take-out: Australian investors have relied heavily on the major banks for dividend income, but mining stocks are now paying out more thanks to the generation of large cash flows.

Discussion about dividends in the Australian share market is at a high at the moment.

That's thanks to the recent announcement of Labour Party policy that would limit the refundability of dividend franking credits, a move that would have a widespread impact on many Australians, especially those relying heavily on dividend tax credits to supplement retirement income. For more on this, see Editor Tony Kaye's article, Digesting the ALP's dividend plans.

This article is not focused on the ALP's proposal, but it does highlight the growing power of dividends in equity investment strategies.

As we think more broadly about dividends, one tool that provides information about the performance of dividends is the Janus Henderson Global Dividends Index. 

The index provides an interesting insight into the role of dividends in providing returns in both global and Australian investment markets.  The headline from the February 2018 update of the index is that in both Australian and worldwide share markets, 2017 saw increases in dividends paid, in the order of 8 per cent globally and 10 per cent in Australia.

Before looking further at the data, it is important to understand a little about the methodology behind this index. The index uses the biggest 1200 countries worldwide – which means that only comparatively large Australian companies are included.  The index is also calculated in US dollar terms, which means that exchange rate fluctuations impact on the returns.

The February 2018 Janus Henderson Global Dividends Index provides evidence around three key themes that will be of interest to Australian share market investors;

• The importance of dividend growth for investors.
• The role that mining companies played in the increase in dividends.
• The worldwide trend for dividend growth.

The importance of dividend growth for investors

Perhaps the biggest potential advantage of using dividends as part of a strategy to supply retirement income is the evidence that, over time, dividend income has tended to increase and provide an important buffer against inflation.  The Australian data from the Global Dividend Index shows evidence of this rising income, with 2017 dividends being $53.3 billion, up from $44.9 billion the year before. 

Longer-term the growth in Australian share dividends might be more consistent with the experience many investors have had of more modest dividend growth, with 2011 dividends being $50.8 billion in Australia, only increasing to $53.3 billion by the 2017 year.

The role of mining companies in increasing dividends

Investors in the big banks are aware of the extent to which their dividends have been flat – for example, NAB shares have now paid seven consecutive dividends of 99 cents per share.  What is perhaps more interesting is the role that mining companies have played in the increase in Australian dividends in 2018. 

In the 2016-17 year there was an increase in Australian dividends from $44.9 billion to $53.3 billion, with $2.9 billion of this due to the contribution of BHP and Rio Tinto alone.  We tend not to think about the mining companies as dividend options, however with recent dividend growth and BHP paying a fully franked dividend of $1.235 on a share price of $29.16 (4.2 per cent dividend yield) and Rio Tinto paying a fully franked dividend of $3.663 on a share price of $76.62 (4.8 per cent dividend yield), perhaps the value of mining shares as dividend options needs to be reconsidered.

The worldwide trend for dividend growth

While the medium-term trend for dividend growth in Australia has not been as clear, internationally dividends have increased in five of the last six years, from $954 billion in 2011 to $1,252 billion in 2017. 

Another measure of global dividend growth can be found in the change in the index since 2009, starting at an index value of 100 and now increasing to 171.2.  The evidence is that global dividend growth has been reliable, with the commentary accompanying the February update to the index also bullish about the current year, expecting ‘strong earnings growth in 2018 to support continued dividend growth'.

Focussing back on the Australian context, the following table sets out the biggest 10 dividend payers in the Australian market – with four out of the top five places being held by the big banks. 

Given the current political discussion around franking credits, it is interesting to see that the value of these tax credits from these top 10 companies alone was more than $13 billion in 2017.

Conclusions

I suspect that there are not many Australian share market investors who don't have an underlying enthusiasm for dividends. 

The Australian share market yield is above 4 per cent per annum and well above the rate of any potential cash interest return even before factoring in the benefits of franking credits. 

The Global Dividends Index provides some interesting information for investors who keep at least one eye on dividends – globally and in Australia dividend growth was good last year, mining companies in Australia played a significant role in participating in that growth and, with the usual caution that should be applied to financial forecasts, the index authors are expecting growth in the 2018 calendar year.