Drop in franked dividends comes at the worst possible time

The big miners are behind the overall drop in blue-chip dividends. Picture: Getty Images

Blue-chip share dividends – the backbone of Australian investor income – are dropping.

And the drop could not come at a worse time as savings rates start to sink.

In fact, having held the mantle as the “dividend market” for the wider world, Australian dividends fell 6 per cent last year while the global market notched up new records and a 7 per cent lift.

A new report from Janus Henderson pinpoints the big miners in particular for the drop. BHP and Woodside are listed as major contributors to the fall, but the report also points to ANZ Bank which recently cut its final dividend.

Janus Henderson says there was dividend growth outside of the big blue-chip stocks. The ASX median growth was 3 per cent, however, this indication that smaller caps did better than blue chips will only be comforting to those holding a very wide diversification of stocks, such as exchange traded funds.

Moreover, the dividend outlook is not encouraging because some analysts believe the big miners face more dividend drops and even the “big four” banks are not expected to offer growth.

The key number here is the dividend yield grossed up. In other words, what does the investor get after franking? For many years it ranged between 5 and 6 per cent but now it is running at about 4.8 per cent.

For investors – especially older income-dependent investors – the biggest risk is that the alternative choices to income, other than fully franked Australian blue chips, often come with higher risk or reduced transparency.

As rates fall on savings accounts, and the hybrid market – once a popular income source – is wound down by the regulators, financial advisers are promoting alternative income funds based on private credit which is a considerably riskier asset class.

For investors determined to stick with Australian shares even when dividends are going backwards, brokers point to Australian listed property trusts, or A-REITs.

However, A-REITs do not offer franked dividends. Rather, the trusts offer distributions. This means low-tax investors such as retirees do not get the uplift from franked dividends.

Another ASX sector now favoured is listed insurers which have managed powerful dividend growth over the past few months. Stocks such as Suncorp, IAG and QBE are handing out big dividend increases.

The “income gap” in the market is also being filled by new funds chasing a clear demand among retail investors for new income choices. For instance the Geoff Wilson-led Wilson group launched its own “income maximiser” fund this week.

As The Australian reported, Wilson will launch the $510m WAM Income Maximiser fund holding both Australian shares and debt – the fund aims to reproduce the cash rate plus 2.5 per cent and franking credits – a grossed-up equivalent of 6.6 per cent.

Peter Gardner of the Plato Investment Management group, which pioneered income maximiser funds in the local market, says the hit to investment income from lower dividends may have been overplayed.

“We think it may actually improve from here. A lot of the downturn is related to the dividend cuts at the big miners BHP, Rio and Fortescue,” he says.

“If we see the iron ore price start to stabilise then we could see the mining sector dividends start to stabilise. It is the key factor for Australian dividend investors; overseas they may well have had better dividend growth but then mining stocks are not as important to global markets as Australia.”

James Kirby hosts the twice-weekly Money Puzzle podcast