The hidden cost of Australia’s love affair with big dividends
High dividends often dominate the thinking of local investors, but long-term growth could matter more than income today.
Australian investors are obsessed with high dividend yields. Thanks to franking credits, they've been trained to expect them. But this fixation on immediate income has the potential to stymie their long-term returns.
Walk into any financial planning office and you'll hear the same story: retirees chasing 6% yields from the big banks, convinced that higher payouts equal better investments.
The logic seems sound and may appeal to particular investors’ needs – more cash today means more security. But this thinking is incomplete. The highest-yielding stocks today are often tomorrow's dividend cuts.
In Australia, the franking credit system encourages companies to pay out as much as possible via dividends, and so they do. While this system has its merits and makes sense in cases where businesses limited to the local market may eventually hit a growth ceiling, Australian investors have been conditioned to expect high yields across their investments. When a company can't grow indefinitely, paying out profits makes sense. But the outcome is stunted dividend growth and limited, if any, business expansion.
