How to maximise your income from share dividends
Dividends are flowing to investors despite COVID crunching bank interest to almost zero. Experts now share their dividend tips.
Money
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Dividends from shares have been squeezed this year amid COVID profit crunches and regulator restrictions, but remain vital for many Australians.
Australia’s biggest companies are typically paying 3-5 per cent dividend yields – well above bank deposits – and retirees love them, often receiving tax refunds from the franking credits attached to most dividends.
These franking credit refunds – usually worth 30c per dollar of dividend – are for company tax already paid, and were under threat from Labor last year before a retiree revolt helped keep the Coalition in government.
But tax shouldn’t be the main reason to focus on dividends, says CMC Markets chief market strategist Michael McCarthy.
“The income is invaluable – it’s also an important part of a long-term investment strategy,” he says.
If you want to maximise income from shares, consider these experts’ tips.
DON’T GET TRAPPED
“Be aware of dividend traps, which is when a share price falls and previous dividends make it look like there’s an attractive yield,” McCarthy says.
“But share prices usually fall for a reason,” he says.
The highest dividend yields in the market are usually for stocks that are tanking.
ASSESS THE FUTURE
Is the company likely to continue paying out its current level of dividends, or will they shrink or grow?
COVID-19 has seen the big banks cut or cancel some of their dividends – partly after a request from banking regulator APRA – but analysts believe the worst is over and dividend growth will resume in the next year or two.
“Look at the sustainability of the dividends,” McCarthy says. “And get individual advice.”
LOOK BEYOND YIELDS
Shaw & Partners senior investment adviser Jed Richards says many investors mistakenly favour high-dividend stocks such as Telstra and the banks over successful higher-growth companies such as biotech giant CSL, which has trebled its share price in five years.
“Total shareholder returns is much more important than just dividends,” Richards says.
While Telstra is “a company going backwards but they’re paying out a lot of money”, CSL investors could simply sell down some of their huge profits for income if needed, he says.
Richards says Aussie companies pay out about 65 per cent of their profits in dividends, well above the US average of 35 per cent.
He expects local stocks to hold onto more of their profits now that their dividends don’t have to be so high to compete with bank deposits.
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