AMP Capital chief economist Shane Oliver said that the Australian dividend imputation system has faced some criticism recently over the fact that Australian companies pay out more of their earnings as dividends compared with overseas companies, with some arguing this is a drag on the potential growth of the Australian economy.
“They say companies are paying out dividends rather than paying workers and investing in capital expenditure for the future,” said Mr Oliver.
“I want to scotch that argument upfront. If you look at history, the dividend payout ratio now isn’t that out of whack with the historical average.”
Mr Oliver said dividend payments have risen slightly because unlike in the past, resources companies are now paying pretty decent dividends.
“It’s very hard to argue they should be investing more in capital expenditure for the simple reason they have just had a capital expenditure boom,” he explained.
“I also don’t see any evidence that dividends are slowing down the rate of business investment in Australia. Businesses aren’t investing as much as we’d like because they are still cautious following the global financial crisis and following the surge in the Australian dollar which made many of them uncompetitive a few years ago.”
Not only is the criticism of dividends off the mark, he said, but there are many reasons why dividends benefit investors.
“If you look at history, companies that pay out decent dividends tend to generate more profits and have higher returns,” he said.
“Often when companies retain their earnings, or too much of their earnings, they waste it on projects that are nothing more than glorifying the chief executive. Hubris takes over. So, it’s better to pay out those dividends.”
Historically, roughly half the returns from Australian shares come from dividends, he noted.
“I like that because it’s like a down payment on your total return. You’re not relying on capital gains as much because you have already got a ‘bird in the hand’ from dividends,” he said.
The fact that companies are paying decent dividends provides some confidence that their earnings are real, and that the company has confidence in its future.
“Dividends also provide a good source of income. The dividend yield on the Aussie share market is around 4.5 per cent. With franking credits added in that pushes up to around 5.5 to six per cent,” he said.
“That makes the share market quite attractive at a time when the cash rate in Australia is 1.5 per cent and likely falling, and term deposit rates are around two per cent and also likely falling.”
