Dividend slash prompts focus on total return investing
Investors need to rethink their ideas away from income investing and towards total return as the outlook for dividends remains troubled, according to Ophir Asset Management.
There was much speculation in recent weeks about the outlook for dividends with sectors such as banks, historically dividend stalwarts, expect to issue a smaller dividend or cancel them altogether. Dividend payments for Australian companies are forecast by more than 30% from their peak in the next year.
As this would make it difficult for income investors, especially retirees, Ophir suggested a focus on total return investing which considered both the dividend yield and the capital return from a rising share price. It could also reduce concentration risk as most dividends are concentrated in a few companies.
Under this method, if the dividend was insufficient then investors could sell a portion of their shares as an alternative way to provide income.
“The key is to look for a total return, one that takes into account the combined gains in both stock price and dividend (including franking credits). It’s not so much where the return comes from but the size of the total return that matters,” it said.
“We understand some investors, particularly retirees, may be attracted to the franking credit benefits of some high-dividend paying companies. Often, however, being too focused on these types of investments in your portfolio can bring in concentration risk and provide sub-optimal total returns.
“The lesson for investors is that high dividend yields don’t necessarily lead to higher dollar values of income over time. Instead, investors should invest in stocks which are likely to achieve the strongest earnings growth over time and, providing a reasonable price is paid for those earnings, will typically lead to the best share price gains.”
According to FE Analytics, within the Australian Core Strategies universe, the Ophir Opportunities fund returned 15.5% over one year to 29 May, 2020 versus losses of 0.24% by the Australian small and mid-cap sector.
Performance of Ophir Opportunities Ordinary fund Australian versus small/mid cap sector over one year to 30 June 2020
AUTHOR
Laura Dew
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