We examined the Australian dividend market in the paper Analyzing High Dividend Yield Strategy in Australia and saw that historically, a hypothetical portfolio comprised of high dividend yield firms in Australia outperformed the broad market portfolio. In this paper, we will outline how practitioners may use an indexing method to seek opportunities from high dividend yield strategies in the Australian market.
The Importance of Dividends
Dividends can be critical in Australian equity investments for four reasons: 1) dividends are a significant source of total return in the equity market; 2) dividend strategies can serve as an alternative for investors looking to generate income; 3) dividends as a factor have historically generated excess total return in empirical research; and 4) franking credits provide extra tax incentives for market participants to choose high dividend yield stocks.
Dividend Contribution to Total Return
While dividends’ contribution to equity total return is widely recognized globally, it appears to be more relevant in Australia particularly. In the U.S., dividends and dividend reinvestment have accounted for over one-third of the S&P 500® total return since 1936. Since 2000, dividends and dividend reinvestment in Australia accounted for more than one-half of the total return for the S&P/ASX 300, higher than 32% for the U.S. and 44% globally (see Exhibit 1).