Look beyond the latest dividend returns

The latest earning season proves that company dividend payouts are choppy. Casting your net wider will help capture broader income returns.

If you own shares in one or more listed Australian companies, you may have been keeping an eye on the latest round of corporate earnings announcements.

Earnings season is the equivalent of “peak hour” for many investors as the roughly 2,300 companies listed on the Australian Securities Exchange (ASX) report their half-year or full-year results.

Importantly, as well as announcing their financial and operational performance details, it’s the time when companies will announce if they’re going to pay a dividend per share.

But, as the latest earnings season finishing at the end of February has just shown, you can’t necessarily bank on receiving a steady dividend income stream from individual companies.

Varied dividend results

Of the 200 largest companies listed on the ASX, almost 90 per cent declared that they would be paying a dividend to shareholders from the most recent half-year earnings period.

Of these companies, over 50 per cent reported they would be increasing their dividend per share payout.

Around 12 per cent said they would be maintaining their dividend per share payout, but around 20 per cent said they would be cutting them.

Feeding into the payout equation were factors such as whether companies would use their available cash to maintain or increase their dividends to investors, or reduce their payouts and keep some of their cash for operational purposes including to cover costs.

Many companies reported the dual impacts of rising interest rates and inflation on their results, particularly in relation to higher debt repayments, higher materials costs, higher wages, and lower revenues.

Income challenges for investors

The variability of company dividend payouts is nothing new.

Far from being stable income streams, individual company payouts can be changeable due to a whole range of factors.

Even holding a portfolio of select top-tier company shares doesn’t guarantee you’ll receive the same level of dividend income from one reporting period to the next.

That’s a genuine problem for many investors, especially those reliant on steady cash flows.

Increasingly, many investors are using equity exchange traded funds (ETFs) and managed funds to cast their investment net much wider than just a few companies, to capture the dividend flows from hundreds of companies.

Harnessing broad dividend streams – rather than relying on dividends from a select group of companies – is another element of portfolio diversification.

ETFs and managed funds receive dividend payments from the companies (or bond issues) they invest in which can then be aggregated and passed through to unitholders as distributions.

Typically, these distributions can either be taken as cash or reinvested back into the same fund to purchase additional units, at the unitholder’s election.

The size of the distribution paid to you as a unitholder depends on how many units you hold as well as the aggregated amount of dividends paid to the fund by the companies in which it invests.

Taking a total return approach

As noted above, there are no guarantees when it comes to receiving dividends from individual companies.

In the latest earnings season dividends (in cents per share) from the top 200 ASX companies rose by 5 per cent. But in total dollar terms, dividends fell by 3 per cent, reflecting lower payouts by some companies.

The dilemma for income-focused investors is choosing an investment strategy that supports one’s lifestyle without having an over-reliance on income streams such as dividends.

In terms of investment income strategies, it’s therefore important to look beyond specific earnings seasons and to take a broader, longer-term approach.

This should involve looking at all sources of investment returns: both income and capital growth.

A total-return approach assesses individual or household goals and risk tolerance, and then focuses on asset allocation to ensure it can sustainably support one’s spending needs.

Unlike an income-oriented strategy, which generally seeks to use income returns for cash flow and preserve capital, a total-return approach encourages using money that has been achieved from capital growth returns over time when it’s necessary to do so.

If your income return falls below your spending needs, you have the option of offsetting the shortfall by reducing your investment holding (that is, taking out some of your profit).

When income returns rise, you have the option of reinvesting to increase your investment holding.

This approach can help to smooth out income during volatile market periods.

While capital returns – which are primarily achieved via upward share price movements – can be a volatile and relatively high-risk component of this strategy, taking a long-term view is paramount.

In addition to the benefit of smoothing out your income, a total-return strategy can allow you to better diversify your risk across different investments.

This diversification can be done across countries, sectors and securities, rather than skewing a portfolio to a segment of the market with higher income yields, or worse, taking excessive risk by reaching for a desired yield.

To find out more about dividends and how they work, call us on 03 5975 6855.

Source: Vanguard

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