The case for dividends if interest rates remain low

While retirees tend to prefer ‘safe options’ for their nest eggs, higher yields through dividends are becoming increasingly popular, writes Peter Gill.

The case for dividends if interest rates remain low

A Westpac-Melbourne Institute Index of Consumer Sentiment survey revealed a thought-provoking insight into investor thinking – more consumers than at any time in the past 45 years do not know where to place their savings.

The September survey of the mood of Australians found a 1.7 per cent decline, to 98.2 points, in consumer sentiment in the usual suite of questions involving family finances, economic conditions and the inclination to buy major household appliances or property.

But the survey also posed additional questions on “the wisest place for savings”, which threw up a very interesting statistic.

In his September commentary, Westpac chief economist Bill Evans reported that responses to the savings questions “show a slight easing in risk aversion, although it remains very high by historical standards”.

Mr Evans added: “Consumers still heavily favour ‘safe options’, 61 per cent nominating deposits, superannuation or paying down debt as the best place for savings, compared to 64 per cent in June.

“The proportion favouring real estate nudged up, but only slightly, from 10 per cent to 12 per cent, and the proportion favouring shares dipped slightly from 10 per cent to nine per cent.

“Perhaps most tellingly, some nine per cent of consumers simply nominated ‘don’t know’ – the highest reading on records going back to 1974.”

The ‘don’t know’ response could well reflect a growing realisation that the low interest rates currently on offer are unlikely to rise any time soon and, in fact, may go lower.

While the survey statistics confirm that the attachment to ‘safe options’ and the appeal of shares is low by comparison, the attraction of higher yields through dividends may see some investors increasingly considering the share market.

Dividends are paid by companies as a way of distributing a portion of their profits to shareholders, a cash return to the owners of the company.

This distribution generally occurs twice a year for major companies listed on the Australian Stock Exchange (ASX) and the directors of the company set a date that defines who are shareholders on that date and, hence, will receive the dividend.

This ‘cut-off date’ is usually set about a month before the dividend is actually paid to shareholders and the share price is subsequently described as ‘ex dividend’. All things being equal, the share price for the company will then drop by the value of the dividend because, prior to the cut-off date, the share price would have factored in the pending dividend.

While investors are keen to receive consistent and known yields, the returns from share dividends are potentially volatile because of the nature of the stock market.

Dividend yield is calculated by dividing the value of the dividend by the share price. A hypothetical example: A company paying a total annual dividend of $1.50 per share, with a share price of $25 per share, for example, would be returning a yield of six per cent. If the share price rises, the yield declines, and vice-versa.

There are no guarantees in the share market and, as independent economist Saul Eslake says, investors have to consider whether they are motivated by returns or preserving the value of their capital.

“There are plenty of shares around that offer much higher dividend yields than you can get on a term deposit, and the tax treatment of those dividends is typically much more favourable than the tax treatment of interest income,” Mr Eslake told YourLifeChoices.

“But as we’ve seen over the past six months with the banks, for example, which have long been favoured by retirees because of their high dividend yields and generally good price performance, dividends can be cut and share prices can go down.”

Have you moved funds from a term deposit because of record low interest rates? If you’ve never had shares, would you consider them now?

Peter Gill has been writing about public policy, business and the economy over a 38-year career as a journalist, ministerial adviser and communications consultant.

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    Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.





    COMMENTS

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    Horace Cope
    14th Jan 2020
    12:09pm
    "Have you moved funds from a term deposit because of record low interest rates? If you’ve never had shares, would you consider them now?"

    Short answer: no and no. I can only speak for our circumstances to explain my reason for my answers. We receive a part pension and the compulsory 5% drawdown on our superannuation which allows us to live as we choose. We are not world travellers nor do we feel the need to have a coffee every day or eat out on a regular basis. These choices are not made because we can't afford them, they are made because that's the way we have always lived and are quite happy to keep doing the same things. We enjoy our life and we accept that not everybody would enjoy a similar lifestyle but if we weren't all different we would all be driving Holdens and banking at the Commonwealth.

    14th Jan 2020
    4:32pm
    With the sharemarket so high it is becoming hard to find value so as it moves up I tend to move more money into cash deposits (not term deposits as they have too many strings). Banks are good value at present with over 5% fully franked dividends if they don't reduce their dividends.


    Tags: money, finance, shares,

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