An improvement in the fundamentals of listed Australian companies has led to dividends climbing back towards more normal levels, and improved the appeal of income strategies which could be particularly suitable for self managed super fund (SMSF) investors.
Australian shares have rebounded while dividends have increased for the first time in 12 months, which will put pressure on companies to pay out their cash reserves, meaning overall yields are competitive against term deposits and the appeal of income based strategies is increasing, according to Scott Bennett, portfolio manager at Russell Investments.
“We are seeing a turning point for dividends. As a result we expect a rise in income-based strategies as the market heads into a period of lower growth where a greater proportion of investors’ total returns could be driven by dividend income,” Bennett said.
Income strategies would be particularly useful for SMSF investors as they begin implementing their transition to retirement strategies, Bennett said.
SMSF investors should also consider share buybacks, which are set to increase as companies move away from conservative balance sheets, he said.
Excess cash can have a negative effect on a company’s return on capital, potentially increasing shareholder pressure on companies to put the cash to work through merger and acquisition activity, or return it to shareholders via a special dividend or buyback, Bennett said.
“Woolworths’ recent off-market buyback is an example of an attractive strategy for SMSFs, as the majority of the buyback price was treated as a fully-franked dividend, therefore allowing significant tax benefits for investors,” Bennett said.
