Investors need right settings to capture dividend flows

Despite strong dividend payments this year, investors would be wise to recognise that there are different equity income strategies and some are not delivering, according to DNR Capital.

Scott Kelly, portfolio manager for the DNR Capital Australian Equities Income fund, said there was an ongoing dividend recovery as the global economy reopened and local economy grew.

“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,” Kelly said.

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During the recent company reporting season, 81% of ASX 200 companies reporting full year earnings declared a dividend and 60% of those increased their dividends.

This included a number of special dividends and buybacks which accounted for approximately $15 billion of a total of $40.9 billion declared.

Kelly said the firm had the belief that a growing dollar income over time delivered the best outcome for retirees, but a focus on yield could be misguided.

“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,” Kelly said.

“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, 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.”

According to FE Analytics, the DNR Capital Australian Equities Income fund returned 37.81% over the 12 months to 31 October, 2021.

This compared to a return of 26.45% from the Australian equity income sector within the Australian core strategies universe and 30.3% from its benchmark, the ASX 200 Industrial index.

Performance of the DNR Capital fund over the year to 31 October 2021




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