Look to sustainable dividends to manage risk
Financial advisers and investors should look at sustainable dividends rather than the very next dividend when managing risks while generating equity income, according to Merlon Capital Partners.
Speaking at the Morningstar Investment Conference, Merlon’s lead portfolio manager, Neil Margolis, said sustainable dividends meant capital was preserved after the dividend was received.
“To understand sustainable dividends you have to understand sustainable cashflow. To do that you have to have as much history as possible on the company – have they generated cashflow in the past, what’s the macro conditions, what is normal for that company, and has the industry and company’s position changed over the last five or 10 years,” Margolis said.
“Once you understand sustainable cashflows and you deduct debt in full because that’s really important to determine what is available in dividends and that’s a good starting point.”
He noted that when selecting companies, investors should avoid starting with the index as it could have concentration risk.
“We like to think of all companies as equal opportunities to look for the best dividends and that’s a non-benchmark approach,” he said.
“The third thing to manage risk is to use stock specific hedging within the fund to retain 100% of the franked dividends but only have say 30% less downside risk.
“That is something is more difficult for individual investors and advisers to do but something we add on top.”
Recommended for you
At least two-thirds of ETF flows are understood to be driven by intermediaries, according to Global X, as net flows into Australian ETFs spike 97 per cent in the first half of 2025.
Inflows for the first half of 2025 for GQG Partners stand at US$8 billion, but the firm has flagged fund underperformance could be a headwind for future flows.
BlackRock has announced its plan to acquire real estate investment firm ElmTree Funds which will be integrated into its new private financing solutions business.
With share price growth of 45 per cent for FY25, Australian Ethical has shared why it believes the firm has done so well compared to its active peers.
