There used to be an investment rule that if you wanted to invest for dividends, Australia was the place to do it.
In most other markets and particularly the US market, the dividends were much smaller, with the trade-off being that the capital growth should be much higher because companies retained profits and ploughed them back into the business to generate more profits.
Australia’s system of franked or tax paid dividends was the cherry on the top of this juicy dividend haul, increasing the effective yield nicely.
A strange thing has been happening recently in that Australian dividend yields are starting to fall, which is something of a blow for the silver tsunami of retirees who have been hoping to fund their retirements with the Australian market’s somewhat unique combination of dividends and growth.
Some numbers compiled by senior investment strategist at Betashares, Cameron Gleeson, clearly illustrate the extent of the problem.
Yields Falling Fast
At a market level, total dividends paid from ASX 200 shares over the year to June 2023 came in at just over $95.5 billion but just two years later that number had dropped to just $83b.
In yield terms that is even worse because the overall value of the ASX 200 has gone up significantly over the same period.
So, for any given $100 chunk of shares, the dividend yield will have fallen by a lot more than the 13% fall in the total amount of dividends paid.
That might be fine if you have been invested for some time because you can manufacture some yield by selling some shares but for a new investor looking for dividend incomes it makes things very tough.
The analysis from Betashares showed that if you had $10,000 in a market cap-weighted portfolio of ASX 200 shares at the start of the 2023 financial year, you would have earned about $500 in dividends that year.
The yield for the same $10,000 investment made in financial year 2024 would have fallen to just over $400 and by financial year 2025 you would have received only $378 in dividends, with the anticipated outcome for the 2026 financial year even lower.
That means the dividend yield on the top 200 shares has fallen from 5% to just 3.8% and is possibly lower still now, which is a big change.
The reasons for the drying up of dividends are not too difficult to uncover.
A Few Reasons for Lower Yield
One reason is the higher multiples shares are trading at, which automatically reduces the dividend yield, even if dividend payments stay stable.
Another issue is the pressure on the main dividend paying companies.
The banks are an obvious case in point, with their rising share prices effectively slashing their once dominant dividend yields from being greater than the yields on their term deposits to something much less impressive.
For the big miners such as BHP and Rio Tinto, a period of paying out significant dividends has also come to an end, with their latest payouts the lowest for seven years.
Another factor is the rise in the number and price of technology stocks, which usually trade at elevated price earnings ratios and usually pay minimal dividends.
The issue for the silver tsunami is that both the ASX 200 dividend yield and the RBA cash rate are both below 4% - one of the few times in recent history this has happened.
Be Careful What You Wish For
Of course, you need to be careful what you wish for because one of the most reliable ways for dividend yields to rise would be an old-fashioned bear market, in which share prices plunge and dividend yields gradually rise, even if the actual dividends paid are cut.
There are some ways to invest for yield now, even after the traditional generalised high yield on the Australian share market might be fading at the moment.
One is to select companies that are still paying strong dividend yields, making sure that they are not fading stocks that won’t be able to maintain their dividend payments,
There is no shortage of exchange traded funds (ETF’s) that offer good yields – some by selecting high yielding shares and others by using more complex strategies such as selling covered calls to enhance income, in the process reducing some upside if the market rises.
The big listed investment companies such as ++Australian Foundation (ASX: AFI),++ ++Argo (ASX: ARG)++ and the long-term dividend hero ++Washington H Soul Pattinson (ASX: SOL)++ also offer a curated solid yield, although they will not be immune from the weakness in dividend yields from large companies.
Then there is the old trick of manufacturing your own yield by buying for growth and then selling off some shares every year according to need.
This can even be a form of profit protection by selling some of the best performed shares in the portfolio every time.
