What Aussie investors can do with shrinking bank share dividends
Many Australians rely on bank dividend income to fund their investment strategy or their lifestyle. When the dividends drop, it tells us something about the businesses.
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The problem of falling profits has reared its ugly head for investors in the past couple of weeks.
Three of Australia’s big four banks – among the most popular shares held by Australians – have disappointed with their dividends as they reported annual profits.
First, ANZ cut the franking tax benefits on its dividend by almost one-third as falling earnings at its Australian business reduce the proportion of profit it makes domestically.
Next, Westpac cut its dividend for the first time in a decade, from 94c to 80c, sending its shares south. And last Thursday NAB took out the dividend chainsaw and cut its payout from 99c to 83c. CommBank announces its next profit and dividend in February.
After being hammered by the financial services royal commission and having to pay back billions of bucks to customers, the banks can’t continue their generous dividend payouts in a period of low interest rates and weak economic growth.
Their share prices have sunk and analysts reckon there may be more bad news to come.
It all illustrates a golden rule of investing in shares: If a company is not growing profits, its dividends and share price will struggle.
Remove all the irrational fear and greed from sharemarkets and you are left with companies. Those companies that make money for themselves will make money for their shareholders. Those that don’t will eventually wither and die.
The banks are too big and too strong to die, but intense competition from rival lenders and a weak economy won’t make life easy for them in the next year or so.
Factor in sharemarkets near record highs, and there’s the potential for a share price slump to match the dividend drop.
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So what can you do?
1. Don’t panic. Banks have proven to be profit machines for decades, and even with their latest hiccups they’re still churning out billions. Yes, there’s rising competition in financial services, but the gorilla will always remain one of the most fearsome beasts of any jungle.
2. Diversify your investments. Many Australians have a huge chunk of their shares sitting in banks because they pay such strong dividends. If flat or falling bank dividends will cause you financial pain, think about some more diverse income-paying shares or investments funds. There’s plenty out there.
3. Put it into perspective. If you’re a long-term bank shareholder, there’s no need to freak out even if prices and dividends drop further. During the Global Financial Crisis bank shares more than halved in value and their dividends temporarily fell by less than 20 per cent. Both bounced back eventually.
4. Have an exit strategy and a tax plan. When making any investment ask yourself how long you expect to hold it, how you’ll eventually get out and how it will affect your tax bill. Even if your strategy is to hold the shares well into retirement and live off the income, it’s still a strategy.
Falling dividends tell us that the banks are struggling. But if you can ride out this latest weakness, their long-term financial returns still beat cash in bank hands-down.
Originally published as What Aussie investors can do with shrinking bank share dividends