Concentration of Aussie dividends sends investors overseas

Yasmine Raso

Senior Journalist, Financial Newswire

11 October 2022

The increasing concentration of Australian stock market dividends into fewer sectors has forced investors to look to overseas stocks as a better source of income returns, according to Pengana Capital Group.

Pengana chief executive Russel Pillemer said dividends being paid by Australian companies have had to contend with rising inflation, increasing interest rates and slowing economic growth alongside mounting concentration.

“With these threats on the horizon it makes sense to spread the risk and consider how dividends can be generated through other investments, including international stocks,” he said.

Pillemer also said 80 per cent of total dividends paid in Australia come from four sectors, with the materials sector accounting for 45 per cent (up from 28 per cent at the end of 2020), and the financial, real estate and energy sectors making up the rest of the 80 per cent.

“Such concentration creates several problems for investors. It forces income investors to choose between buying potentially overvalued companies to meet their income requirements, or appropriately diversifying their equity exposure,” he said.

“Many of these companies have share prices which are exceedingly sensitive to dividend payments, potentially leaving them under pressure if dividends falter.

“The sustainability of dividends (and share prices) in these sectors is closely linked to the health of the domestic property market, and global demand for commodities.

“Cyclical industries expand and contract in line with economic cycles, which means dividend payments by these companies are particularly vulnerable to a downturn in either property or commodities.”

Pillemer also said investors can hold on to their franking credits while also diversifying their portfolio to generate several sources of income by investing in alternative structures such as listed investment companies.

“Investors can diversify to include overseas stocks while keeping their franking credits, but it’s all about investing in the right structure.

“The listed investment company structure has been successful in its mandate to provide overseas exposure along with franking credits to its shareholders.

“This includes exposure to stocks in sectors which aren’t well represented on the ASX, providing genuine diversification for investors, within an added ethical investing framework.”