There has been much commentary on the fact that shares paying strong fully franked dividends, like the banks & Telstra, have performed very strongly in recent times. It seems likely that this trend will continue and is also likely to be seen in overseas markets.

Australia has had a far higher payout ratio than other developed markets over the past 20 years.  See Morgan Stanley’s chart below. This in part reflects dividend imputation, which raises the tax effectiveness of distributing dividends to shareholders.

Gerard Minack from Morgan Stanley argues that the Australian equity market is a good example of how dividend-focused global equity investors could become – and how corporates do respond to changed incentives.


The search for yield has boosted dividend-paying equities. While the relative valuation on stocks with above-average dividend yield already looks rich, the factors pushing investors in this direction seem likely to persist for the foreseeable future. Dividends may remain an outperforming theme for some time.

Minack argues that several factors have pushed investors to place an increasing premium on dividend-paying equities.

“First, the yield on debt instruments is exceptionally low. Given central bankers willing ‘to do what it takes’, it seems likely that rates will remain low for some time. (And, of course, the process of normalizing rates – whenever it comes – will for a time likely impose mark-to-market losses on many fixed income assets.)

Second, economic and earnings growth remains tepid. That reduces the relative attractiveness of cyclical equities that are leveraged to the economic cycle.

Third, with global profits already at a relatively high share of global GDP, it seems unlikely that earnings can grow faster than GDP for a sustained period. With nominal GDP itself relatively sluggish, that points to ongoing mediocre earnings growth.

Fourth, ageing baby-boomers, who control a disproportionate share of invested capital, are moving from the stage of building up their nest egg to living off the nest egg”.

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