Why Dividend Yields on The ASX Could Fall Over The Next Few Years

Some of Australia’s biggest companies could lower their dividend payouts over the next few years. Included among them are the likes of Telstra [ASX:TLS] and the big four banks. Throw in iron ore giants like Rio Tinto [ASX:RIO], and you have a who’s-who of generous Aussie dividend paymasters.

So what’s causing this? Flat earnings for a start. Profit margins are narrowing while costs are rising. But the bigger problem is debt. Companies are borrowing more as a result of flatlining earnings. Some of this debt is reserved for progressive dividend payouts.

But the market should have seen this coming, as hungry as it was to eat up its share of company profits. Investors aren’t stupid. Many were well aware that high dividends yields weren’t just coming off the back of actual earnings growth.

Take Rio Tinto [ASX:RIO] for instance. They’re facing the very real prospect of funding dividend payments through debt if iron ore prices fall any lower. If iron ore fell to $44 a tonne, profit margins would be squeezed beyond breaking point. To maintain their 4.6% dividend yield, Rio would need to cut expenditure, or raise debt to maintain their dividend payouts.

ASX dividend payouts have risen in the last four years…so why the sudden concern over future dividend yields?

If the last few years are anything to go by, it doesn’t seem like dividend yields have reached their ceiling on the share market.

The ASX dividend payout ratio has been on an upward trend over the past four years, increasing from 55% to 74%. The payout ratio calculates the percentage of earnings paid out as dividends. That figure puts the payout ratio at a 20 year high.

Yet stocks on the ASX have remained flat during the last four years. More worryingly debt levels have risen twofold. That’s why Credit Suisse thinks high yields can only be supported by debt-driven payments to investors.

And it helps explain why they’re predicting that the broader share market payout ratio will fall in the next couple of years. The concerns over tepid growth prospects and rising debt — and what this means for dividends — may only intensify. That could force investors hunting higher dividend yields away from these blue-chip stocks.

Why Deutsche Bank urges investors to seek earnings growth for dividend yields

Deutsche Bank says the concerns over the ability of these major Australian corporations to maintain dividend growth will lead investors to seek higher yields elsewhere. They see a market shift from traditional high dividend paying stocks into dividend-paying stocks posting earnings growth.

We may have seen the first signs of this take place across the major banks last month. Bank shares dropped on the back of competitive pressures, rising costs, and narrowing growth margins. Commonwealth Bank’s [ASX:CBA] profit earnings of $2.2 billion were unchanged from the previous year.

Investors weren’t satisfied with lower than expected dividend growth, following flatearnings growth. CBA shares have dropped by $4 since 5 May to $84.18. This will only add pressure on CBA to maintain their 4.94% dividend yield. If dividend growth fails to meet market expectations, CBA would have to pay out dividends through cash reserves, more debt, or further cost cutting.

The major banks have had a special place among investors seeking strong dividend yields over the past few years. But Credit Suisse say that the banking sector’s dividend troubles will also extend to the rest of the share market in the next three years.

It remains to be seen whether the prospect for falling dividend yields across major blue-chip stocks will result in major selloffs among dividend investors. While dividends aren’t the only measure of a stock’s prospects, they are important for many investors. If analysts are correct, then dividend investors could be moving their portfolio towards companies posting earnings growth.

Mat Spasic,
Contributor, Markets and Money

PS: Every stock investment, no matter how good it looks, has an element of risk attached to it. As Markets and Money Managing Editor Bernd Struben would say, more risks equals…more risk. That doesn’t just apply to dividends; every company you invest in comes with its own unique dangers.
That’s why he’s written a free report, ‘Three Essential Rules to Boost Your Profits and Lower Your Risks’, to help you understand the golden rules for creating wealth in the stock market. In particular, Bernd is keen to share the one investing rule that could save you thousands of dollars. You’ve no doubt heard of it. But most investors ignore it. You’ll learn how this single investing rule can boost your portfolio profits.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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