Worried about the blowtorch to dividends? Consider diversified alternatives

The recent end to the 30-year party of high dividends reveals how exposed many Australians are to this passive income-stream.
By · 1 Sep 2020
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1 Sep 2020 · 4 min read
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The decision by three of the big-four banks to defer their dividend, as they grapple with the pressures of COVID-19, heralds a more austere era for shareholders, and more acutely self-funded retirees. Not only was their regular dividend cheque put on hold, but any future payouts are likely to be smaller.

While bank’s typically return 70 to 80 percent of their profit to shareholders as dividends, future payout ratios are likely to be closer to 50 percent. Westpac was the first of the big-four to scrap its first half dividend. While that might be paid in November, the payout is expected to follow that of CBA Bank’s, which recently slashed its dividend by 31 percent.

Consensus estimates suggest average dividends over the next 12 months will be between 3 to 3.2 percent (4.5% including franking credits), compared with 4.5 percent previously (5.75 including franking credits).

Relying on yield from a single asset is flawed

Admittedly the chase for better returns from investments like InvestSMART’s four ETF portfolios requires you to take on riskier assets than fixed income or cash, but unless you’re comfortable with eating into your capital, staying in fixed income isn’t a viable option and here’s why. 

The sub 1 percent yield on a 12-month term deposit is struggling to keep pace with inflation, which ABS data suggests self-funded retirees are currently incurring at 1 percent. When taking stock of alternative investment options, it’s important to remember that A) the minuscule yield on fixed income/cash could result in the value (aka buying power) of your capital going backwards, while B) previously high dividends from stocks will be less bankable into the future.

The power of diversification

The recent fall in dividend payout ratios serves to remind all investors of the need for diversification away from reliance on yield from a single asset, whether it’s income from a term deposit or a dividend-paying stock.

The good news is that despite sweeping dividend cuts, up to 95 percent of the top-100 ASX companies still have greater yields than 12-month term deposits. One way to tap into these, without buying the whole market, is through one of InvestSMART’s blended ETF portfolios.

It’s true, there is more risk associated with owning an InvestSMART ETF portfolio than a low yielding (government guaranteed) term deposit. However, due to their built-in diversification, there’s less risk in owning any one of the InvestSMART’s ETF portfolios – from Conservative through to High Growth – than placing all your income expectations on one or two fickle dividends.

The risk is mitigated because you’re no longer putting all your eggs in one basket. A carefully chosen selection of ETF’s within an InvestSMART portfolio, exposes you to more upside than a single asset. Based on the ETF’s we’ve chosen, the focus is not solely about achieving an extra percentage of yield.

While investing in a single bank does provide some capital growth as well as yield, listed income-plays are not typically growth stocks.

Time to explore a total returns approach

That’s why InvestSMART’s four ETF portfolios are more focussed on total returns than just dividend yield. InvestSMART adds to your wealth by capturing the dividends in the cash component on the portfolio, and then using it to buy more holdings when the portfolio is rebalanced. You’ll also reap the benefit of compounding returns.

By taking a total returns approach, InvestSMART maximises the overall return of your portfolio, rather than simply preferencing income over growth, while also reducing the risk of capital loss.

We do this by allowing capital gains to supplement the income generated elsewhere within our portfolios. One of the other benefits of total return investing is that it provides better control over the size and timing of withdrawals, and InvestSMART withdrawal options help you set this on autopilot.

With an InvestSMART ETF portfolio, you also get to decide how much and how often you take cash, rather than waiting for a schedule of underwhelming dividend payments.


Find out more about InvestSMART diversified portfolios here.

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