Many investors may be surprised to hear that dividends paid by companies have accounted for 38% of the total return for Australian equities since 1981. Buying companies that pay strong, sustainable, tax effective dividends has been a long term strategy which has often been profitable across market cycles.
Dividends – A Critical Component of Equity Total Return
According to SSgA Research, dividends have historically been a critical component of the overall return from an investment in Australian equities. On a cumulative basis, dividend income has contributed more than one third of total return for Australian equities since 1980, with capital appreciation accounting for the rest (See Graph 1). During the last decade this proportion has increased, with dividends contributing around 45% of the total Australian equity return over the 10 years to December 2009. Quite clearly dividends matter to total returns.
Graph 1: Australian All Ordinaries Index – Growth / Income Returns December 1979 to June 2010
Compounding Effect
To illustrate the effects of dividends on equity returns, the history of price and dividend reinvested total returns of the MSCI Australia Investable Market Index from May 1994 to June 2010 is illustrated in Graph 2. Excluding dividends, a $100,0002 investment in the MSCI Australia Investable Market Index on 31 May 1994 would have grown to $225,942 by the end of June 2010. The same amount of investment with dividends reinvested would have amounted to $422,492 during the same period, almost doubling the investment return without dividend reinvestment.
The MSCI Australia Select High Dividend Yield Index provides a suitable benchmark for investors seeking to build a diversified portfolio focused on dividend yield. The index targets companies paying above average dividend yields that also meet sustainability and persistency screens (security screening criteria established by MSCI to exclude securities which are not expected to sustain their dividend yields in the future). Further information is available at http://www.mscibarra.com/products/ indices/custom/methodology.html.
Exchange Traded Funds (ETFs) have become increasingly popular among both institutional and retail investors as a means of gaining passive exposure to a market segment or index. An ETF contains a basket of shares that tracks a specific index, providing instant diversification compared to a single share. ETFs can be bought and sold on listed stock exchanges through brokers just like normal shares, giving investors full control and flexibility over their investment.
Some benefits of using a passive ETF may include trading flexibility, diversification, low management costs and transparency. Given they are passively managed, ETFs tend to have lower turnover than actively managed funds which can reduce overall transaction costs. Another major advantage of ETF strategy is its transparency. Transparency levels are high; investors usually have access to the underlying index methodology, with performance and regular reporting also required by the Australian Securities Exchange.
The SPDR® MSCI Australia Select High Dividend Yield Fund tracks the MSCI Australia Select High Dividend Yield Index and has been launched with a particular view to investors seeking above average dividends from their equity investments. Investors should consult the PDS which is available from www.SPDRs.com.au before investing.
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