Australian sharemarket dividends falling

And banks’ dividend growth has failed to keep pace with stock prices, and once-attractive dividend yields have vanished. While there are other stocks delivering significant dividend growth and/or solid returns, such as Wesfarmers, Premier Investments and Atlas Arteria, they have failed to close the gap.

On top of that, the other big source of income, interest on cash and term deposits, is being eroded by the RBA cutting interest rates. In fact, apart from the Covid crash, we have never had another time in the last 50 years when the ASX dividend yield and the RBA cash rate fell below 4 per cent at the same time.

This has major implications for Australian investors, particularly those who rely on cash and shares to generate income. One option is to choose a portfolio of stocks that have historically paid high dividends, but this can expose the investor to “dividend traps” (stocks with unsustainable dividends, poor stock price return, and stocks that may experience dividend cuts).

Alternatively, there are strategies that can create additional sources of income from a portfolio of dividend-paying stocks. For example, covered call ETFs are a way for investors to earn additional income from stocks and reduce volatility in portfolio returns.

One such approach involves selling call options on a portfolio of shares held. This allows investors, in addition to owning the shares, to benefit from the proceeds from selling call options, but with some reduction in their potential upside if the shares perform strongly.

These strategies are also widely used in other markets, such as the United States, as a way to generate income in addition to dividends.

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Elsewhere, ETFs that provide exposure to companies with high dividend yield forecasts are increasingly being adopted by investors.

While these types of ETFs are not new, the latest generation also uses market-based signals such as price momentum and volatility to screen out potential dividend pitfalls that could negatively impact dividend-focused strategies.

Australian investors are known for their interest in dividends, so it’s little surprise that ETFs, which help grow income, are increasingly being adopted in portfolios. Over time, we expect the trend of ETF adoption to continue as investors look for ways to diversify their income sources into other parts of the market.

The recent decline in dividend income from Australian shares does not mean investors should give up on their life goals and aspirations. However, income-oriented investors may need to reconsider their investment strategies.

Fortunately, today there is a wider range of solid investment solutions that can help these investors and other Australians achieve their financial goals.

Cameron Gleeson is a senior investment strategist at ETF provider Betashares.

• The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.

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