After 37 years of declining interest rates that have fuelled asset price increases but laid waste to lower-risk income streams, it is perhaps surprising that now should be the time to be discussing dividends. But dividends are back in the spotlight, in no small part due to pronouncements by central bankers including the US Federal Reserve’s Jerome Powell and the Reserve Bank of Australia’s Phillip Lowe that low short-term rates are here to stay, perhaps for years.
The search for higher income and yields
The desire to deliver income in a low yield and low growth world is, we believe, driving a surge in corporate merger and acquisition activity. And the buyers aren’t just trade operators but also large pension and superannuation funds looking to enhance income returns to their clients, investors and members.
Evidence of this demand is reflected in mutterings by the NSW Government that they are considering selling the revenue stream from gambling taxes (to also plug the hole left by changes to stamp duty), and in Telstra’s idea to spin off its cell towers.
We recently wrote about this thesis, translating the search for income and higher yields by pension and super funds into the purchase of securities in companies with boring but stable annuity-style income streams. Included in the list of small cap candidates are REITS such as National Storage REIT and retirement and caravan park owner Ingenia Communities Group, as well as companies where we believe reliable annuity income streams are being developed such as Macquarie Telecom and Uniti Group.
Will the banks return higher dividends?
The banks are also back in the spotlight with a meaningful rebound possibly underway in the prospects of higher dividends. Prior to the global pandemic, bank dividends amounted to A$24 billion in 2019, representing almost a third of all of the dividends and franking credits paid by companies listed on the Australian share market.
While vaccination programs are still underway and COVID mutations may yet keep company boards on edge, stronger balance sheets, a recovery in the economy and particularly real estate prices should give the banks leeway to increase their payout ratios.
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