Investors who piled into tech stocks during COVID-19 will have missed out on the record $36 billion in dividends that Australian companies declared during the February reporting season.
Much of the record payout was driven by the bumper profits and dividends of the large miners, which benefited from strong iron ore prices and were largely unaffected by lockdowns and restrictions.
It is a stark reminder to those mostly younger investors, many of whom started investing during the pandemic in non-dividend paying tech shares, of the importance that income – not just capital gains – in the building of wealth.
Income plays a big role in wealth buildingCredit:Istock
While Australian share prices have almost doubled since the start of 2004, the “total” returns – which assumes the dividends are re-invested as they are paid – have risen almost four times.
It is something that investors who piled into tech shares should bear in mind, says Peter Warnes, head of equities research at Morningstar.
“You will have spikes where capital [share price gains] is the major driver of returns,” Warnes says. “But over the long term, income is the largest part of total return,” he says.
Among the standouts of the February reporting season was BHP, which declared $10.7 billion in dividends after a stellar half-year with its core iron ore business achieving near-record production.
‘You will have spikes where capital [share price rise] is the major driver of returns.But over the long term, income is the largest part of total return.’
The $36 billion in interim dividends declared in February that covered the six months to December 31, 2021, was well ahead of the $25.8 billion declared in February 2021 and the $27.5 billion declared in February 2020, figures from CommSec show.
Along with the bumper profits of the miners, the record interim dividends were also partly due to companies restoring payouts that were reduced or cancelled during the worst of COVID-19.
The Commonwealth Bank lifted its interim dividend from $1.50 to $1.75 per share – halfway back to the $2 per share paid pre-COVID-19 – on strong profit growth during the December half.
Craig James, the chief economist at CommSec, says some companies, such as airlines, gaming and travel companies are not yet in a position to issue a dividend.
“But the lift in COVID-19 restrictions and the opening of international borders provide optimism for the current financial year,” he says.
Australian companies, on average, pay higher dividends than companies listed on overseas markets, and those dividends are taxed favourably for investors thanks to Australia’s dividend imputation system.
Craig James says that many companies have “dividend reinvestment schemes”, which allow shareholders to reinvest all or part of any dividend paid on their shares in additional shares instead of receiving the dividend in cash.
“Some shareholders seek cash dividends to maintain their lifestyles,” he says. “Others may have less immediate need for cash and prefer to reinvest the dividend in shares, as they maintain a positive outlook for the company,” James says.
Morningstar’s Warnes says investing in shares through superannuation can be an even more effective way to build wealth over the long term, rather than holding the shares directly.
He says many large superannuation funds allow members to make “direct” investments, where some of their super can be allocated to individual Australian shares.
In return for the concessional rates of tax inside superannuation, the money cannot be accessed until a condition of release, such as retirement, is satisfied.
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