Dividends – some income comfort in uncertain times?
Local investors have suffered a rude awakening over the least six months realising that many so-called low risk fixed income investments are not always what they appear. Income (and capital!) can be significantly at risk if the deposit-taking institution faces liquidity and/or confidence problems. By contrast, dividends paid by listed New Zealand companies look increasingly attractive and are generally underpinned by strong cash flow and therefore may offer some comfort in nervous markets. The NZX50 Index has a forecast gross yield (ie including imputation credits) of 8.0%pa for the 2008 year rising to 8.6%pa for 2009. As shown in the following table, a selection of NZX50 companies look compelling in terms of dividend yield, particularly when long-term interest rates appear likely to be heading down through the second half of this year. 2008 Gross Dividned Yield %pa 2009 Gross Dividned Yield %pa Dividend Cover (times) Payout (%) Fletcher Building 9.2 10.6 2.0 52 Freightways 5.8 9.6 1.3 75 Goodman Fielder 8.1 8.8 1.2 86 Nuplex 9.4 10.3 1.4 59 Sky City 9.6 10.6 1.1 91 Telecom 10.0 8.9 1.4 75 Vector 10.5 10.4 1.2 86 NZX50 Average 8.0 8.6 Most of the dividend yields shown above exceed bank deposit rates and all are covered at least once by earnings which provides a cushion if profits come under pressure. The attractiveness of these yields for new investment funds has been enhanced by the lower level of the sharemarket – down by 15% over the last six months. While the risk profile of the sharemarket is higher than that for fixed income assets, investors with a longer term view should consider including a selection of sound companies paying good dividends. Share prices will rise and fall but there are good reasons to believe that dividend payments will persevere if investors make astute company selections. Furthermore, over time dividend payments generally rise, unlike fixed interest payments which as their name suggests, are fixed. The local fixed interest/debenture market remains inefficiently priced with investors frequently under rewarded for much of the risk they assume when they place funds on deposit, particularly with second tier institutions. New Zealand investors are yield-hungry but mostly unaware of how yield relates to risk. The finance company sector has exploited this fact and has made abnormal profits from debenture holders by offering the skinniest of margins over bank deposits – and it’s still the case. One strategy for investors to consider is focusing on quality listed companies paying attractive dividends which are subject to disclosure rules to monitor their progress and where investors have the flexibility to sell if they chose, rather than being locked into a deposit provider with deteriorating prospects. Graeme Thomas – 28 April, 2008
