Following a strong recovery in dividend payments this year, investors’ focus has returned to equity income strategies as a way of increasing portfolio yield. But they would be wise to recognise that ‘there are different equity income strategies, and some are not delivering’, according to DNR Capital, a leading Australian equities investment manager.
Scott Kelly, Portfolio Manager for the DNR Capital Australian Equities Income Portfolio and Fund, says: “We see an ongoing dividend recovery as the global economy reopens and the local economy grows. We also see the prospect of higher dividend payout ratios as boards regain confidence and utilise franking credits, rewarding shareholders in a low yield environment.”
During the recent company reporting season, 81 per cent of ASX 200 companies reporting full-year earnings declared a dividend. Of those, 60 per cent increased their dividends and the aggregate payout increased by 70 per cent.
A notable feature of the results season was the number of special dividends and buybacks, which accounted for approximately $15 billion of a total of $40.9 billion declared.
Kelly says: “We start with the belief that a growing dollar income over time delivers the best outcome for retirees.
“There are equity income strategies in the market whose managers focus on high yield, not dollar income, and discount the role capital has to play in a retirement strategy. This can come at the investor’s expense.”
For example, a high yield could be the product of a low share price, which may reflect difficulties in the business. In such cases, dividends might be at risk of being cut.
Some companies with high dividend yields may actually have low, or even negative earnings growth prospects. This will limit future dividends and will likely impact their share price as well.
Kelly says a focus on dividend yield can be misguided. Over the long term a high-yielding stock with low or no earnings growth and a poor capital return will pay less dollar income than a stock with a lower yield but stronger earnings and capital growth. Dividend yield is the stock price divided by the dividend per share and a high yield could actually be a reflection of a weak share price and poor earnings growth.
Commonwealth Bank (CBA) is trading at a higher dividend yield, currently around 3.2%, than Macquarie Group (Macquarie), at around 3%. CBA’s higher yield might suggest it is a better option for an equity investor seeking income.
But Macquarie has enjoyed much higher growth then CBA over the past decade. Its dividend payments have almost quadrupled since 2011, while CBA’s have remained broadly in line. Macquarie is in the DNR Capital Australian Equities Income Fund, CBA is not.
The DNR Capital Australian Equities Income Fund produced a return of 37.78 per cent over the 12 months to the end of October*, compared with a 30.30 per cent return for the S&P/ASX 200 Industrials Accumulation Index over the same period. Noting that past performance is not an indicator of future performance.
*Total return shown for the DNR Capital Australian Equities Income Fund has been calculated using exit prices after taking into account all of the product’s ongoing fees and assuming reinvestment of distributions. No allowance has been made for entry fees or taxation.
The DNR Capital Australian Equities Income Portfolio is a Separately Managed Account (SMA) that aims to outperform the S&P/ASX 200 Industrials Accumulation Index and deliver higher levels of income (before fees) over a rolling three-year period by investing primarily in ASX listed securities with a focus on those included in the S&P/ASX 200. It is style neutral with a focus on quality and sustained income growth.