Will Dividend Investing Be a Thing of the Past?

Dividends can mean a lot to investors. If a stock is paying steady, high dividends that can sometimes be enough for investors. This means that, for some investors, dividends are more important than the financial strength of the company.

However, companies who pay high dividends generally have strong financials. That’s why they’re able to pay out higher dividends. The steady stream of income is one of the advantages of being a dividend investor. Another is that, instead of having to buy or sell at the right time to make a profit on the stock market, dividend investor typically sit on their investments.

Well, that isn’t entirely true.

Of course, you still need to buy a stock to be eligible for a dividend payment. But, more or less, the strategy is to buy and hold on. And if you happen to have bought a stock that also increase its share price over time, you would stand to make some capital gains too.

Could dividend investment strategies become a thing of the past?

I’m not implying that companies will stop dividend payments altogether.  Yet more and more of the big dividend payers are cutting dividends to shore up cash for a rainy day.

You could call this an investment in future growth. If a company can free up more cash, it has the option to invest more money in the business.

The Reserve Bank of Australia has been a big critic of high dividend payers. The RBA believes banks should focus on their own future growth plans. Not just to increase shareholder returns, either. Miners and banks are now putting the brakes on dividend growth.

BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] have already cut their dividends by more than half. And both have already reviewed their progressive dividend policies.

Dividend High watermark out of reach until 2018 asx 200

Source: Credit Suisse

The graph above shows the total amount of dividends paid by three sectors. Commodity companies have considerably cut back payments in 2016. But not much else is expected for dividends in the near future. Growth seems to be stagnating.

And, if we look at wider economy, it makes sense too. Things are going well for miners and banks. Commodity prices are down. Any change they get to move up is another opportunity to sell them right back down. Banks are now finding it harder to grow earnings under pressure from higher funding costs.

Both of these sectors are using cash not just to invest in the future, but to maintain margins and balance sheet strength. It’s possible that these numbers pick up when the wider economy does too.

CommSec reported 91.2% of ASX 200 companies paid an interim dividend this year. This is up from 85% over the last 12 reporting seasons. The current dividend yield for investors, of 4.89%, is also the highest it’s been since the global financial meltdown in 2009.

So the high dividend payers are out there. You just have to look for them. One good example is Blackmores [ASX:BKL], which nearly tripled its interim dividend. Blackmores’ next dividend payment, 24 March, is expected to be $2 per share.

Blackmores was able to profit on the back of growing Chinese demand. So it’s possible that investors may look towards explosive markets in a bid to find higher dividend yields. Money Morning’s income special, Matt Hibbard, has written a report on how, and where, to find the best potential big dividend payers of the future.

In Matt’s report, ‘Top 5 Dividend Stocks in Australia for 2016’, he’ll reveal how investing in high dividend payers could boost your savings and retirement fund. To get your free copy of Matt’s report, click here.

Härje Ronngard,

Junior Analyst, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia